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Indian Education Sector

INDIA RESEARCH

Long way from graduation!
Nikhil Vora Shweta Dewan

January 2009

Class of 20??

Sector report

INDIA RESEARCH

16 January 2009 BSE Sensex: 9047

Indian Education
Long way from graduation!
“Over-regulated and under-governed” best describes the largest sector in India – Education (IES). In a failed public education system, aspirations are meeting affluence and taking private IES through a phase of Price Discovery. Ironically, the gargantuan potential (estimated private spend of US$50bn; $80bn by 2012) is trapped! The ‘not-forprofit’ nature of the $40bn formal IES has deterred for-profit private participation while inability to transform education into a ‘process-driven’ model curtails scalability in nonformal IES ($10bn). Our investment thesis in IES rests on 4Cs – players with Credibility (management intent & ability), Capital (built to last), Creativity (to ‘manage’ the overregulated environment) and Content (to differentiate and build annuity). We see limited value creation potential in the space, mainly due to scale issues. However, Educomp Solutions and Manipal Universal Learning (unlisted) exhibit the 4KSFs with strong pricing power as indeed ability to create an annuity pool and are our bets in the sector. IES – the ‘Largest’…inefficiencies the ‘Highest’: IES is by far the largest capitalized space in India with $30bn of government spend (3.7% of GDP; at global average), and a large network of ~1m schools and 18,000 higher education institutes. Yet, the public education system is ‘insufficient’ and ‘inefficient’, leading education-hungry and affluent Indians to spend $50bn on private education (14% CAGR over FY08-12E). Investability Quotient – the ‘Lowest’: The ‘not-for-profit’ diktat, a poor regulatory framework and low risk-appetite have discouraged for-profit participation in the lucrative private formal IES. With no structural change in sight (rampant corruption and low political will), IES has attracted limited capital. Meanwhile, non-formal IES – while non-regulated and faster-growing – fails the scalability test (barring a few pockets). Betting on mavericks: Though a few smaller players have attracted some capital, we see limited value creation potential in IES due to regulatory and scalability issues. Armed with creativity, certain for-profit players are using innovative two-tier structures to unlock the ‘surplus’ generated and, more importantly, plough it into scalable (as also transparent) business models. Exhibiting the 4Cs, we like Educomp Solutions and Manipal Universal Learning (unlisted) -- players with scaled-up and annuity businesses as also strong pricing power.
Valuations
FY10E Company
Educomp Solutions Everonn Systems NIIT

Prices as on 15 January 2008; *Valuing NIIT on core earnings ex-share of associate

“For Private Circulation only”

“Important disclosures appear at the back of this report”

IDFC - SSKI INDIA

Contents
Investment Argument.........................................................................................4
IES: The ‘largest’… .......................................................................................................... 5 …yet IES a long way from graduation.............................................................................. 8 Low IQ of IES, but we are betting on mavericks............................................................. 13

While formal IES (80% of total) is lost in a regulatory maze (not-for-profit mandate).7% of GDP. highest dropouts • 61% of target population enrolled.IDFC . at 3. But while money attracts more money.6% vs 3.7% of GDP) • Private spend of $50bn (14% CAGR over FY08-12E)
Inefficiencies – The Highest
‘Insufficient’ funds • Free product (public schools) loses market share – 40% of the student base enrolled in private schools (7% of the total school network) ‘Inefficient’ supply • 66% of the school network only till primary level • Only 0.SSKI INDIA
INVESTMENT ARGUMENT
India’s well-capitalized public education system has failed miserably due to remarkably high level of inefficiency (37% net enrolment at school level!). Centre’s budgetary allocation up 6x in 11th Plan period Private spend on education: 5% of average HH income (12% in USA.85% of USD 30bn spent on capital expenditure Lowest enrollments. Educomp Solutions (FY08 revenues of Rs2861m) and Manipal Universal Learning (Rs8631m) are the two scaled-up and annuity businesses that we like.97 at higher education level
Investability Quotient (IQ) – The Lowest
$40bn:‘overregulated & undergoverned’ • For 80% of the private spends (formal IES). no rules/ regulations in place for foreign universities to be recognized under UGC (University Grants Commission)
Source: IDFC.82% as capital expenditure. Capital and Creativity separating the ayes from nays. scalability remains a big issue
Players exhibiting the four key success factors (4Cs) . With Credibility.SSKI Research. CAGR of 8. also.000 HEIs (largest globally) Regulatory framework: K12 and HEIs required to be run as not-for-profit institutes set up under a Trust/ Society. 15% in China). Content. *GER – General enrollment ratio
Exhibit 2: IES – a factsheet
Govt spend (Centre + states) on education: $30bn. the highly fragmented non-formal segments are in a scalability bind. 40% dropout at school level (a mere 37% net enrolled) • Lowest GER* globally of 9. 8% CAGR over FY08-20E (growing fastest globally) Network: ~1m schools.000 HEIs • First Indian satellite . Creativity (to ‘manage’ an over-regulated environment) and Content (ability to differentiate and build annuity) offer maximum value creation potential
Source: IDFC-SSKI Research. MHRD
JANUARY 2009
4
. 80% on teachers’ salaries. regulations (not-for –profit mandate) a big deterrent • Low political will to bring about the much required structural change
Largest Supply • A network of ~1m schools and 18. 0.000 (7%) are private – 40% of enrolled population attends private schools.2% in consumption. of which 75.Credibility (management intent & ability). comparable to global average. it has ironically eluded IES (just $180m of private equity capital chase) – a function of limited value creation potential. >90% spend on K12 (kindergarten to 12th grade). With few ‘relevant’ players above the $20m mark. This has led to a whopping $50bn annual spend on private education ($80bn by 2012E). We met around 45 players in the space and conclude that IES is a long way from graduation. 18. though 100% FDI allowed through automatic route.
Exhibit 1: Indian Education Sector (IES) – an interesting class
IES – The Largest
Largest Capitalized space • Public spend of $30bn (3. Capital (built to last).EDUSAT (launch Sep-04) to serve the education sector Largest Demand • Globally the largest population of 572m within the 0-24 years age group
$10bn: Scores low on scalability • For remaining 20% (non-formal IES). only players working to acquire the 4Cs would show higher Investability Quotient (IQ).

yet the system highly ‘insufficient’ & ‘inefficient’
India spends 5.7% of GDP. Importantly. from primary to tertiary levels) lives in these countries. the Centre has allocated a 6x higher spend on education. at ~3. of students enrolled 11m
.
5
JANUARY 2009
Bangladesh
UK
Malaysia
Germany
Pakistan
France
Japan
India
US
.. USA’s assigned public spend amounts to 25% of the cumulative spend on just 4% of the target population group. India’s public spend on education amounts to ~5. it is in line with the global average). of colleges 18.2% of global spends on education…on 20% of world population
The statistics are indeed impressive. In sharp contrast.025. the extent of the spends have created one of the ‘largest’ education networks globally of ~1m schools and 18. less than 10% of the world’s school-age population (5-25 years of age.000 Total no.
Exhibit 3: The ‘inefficient’ equation – ‘Largest’ capitalized = Largest demand = ‘Largest’ supply IES – Largest capitalized space
Expenditure on Education (in Rs bn) expenditure on education (as a % of public expenditure) expenditure on education (as a % of GDP) 1500 16%
Government spend as % of GDP – India at the global average
8
6
12% 1000 8% 500 4%
4
2
0
Indonesia
Philipines
Brazil
Chile
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0%
Source: (1) GDP figures are taken from National Accounts Statistics
Source: UNESCO
(2) Budgeted Expenditure on Education published by D/o Secondary and Higher Education
Exhibit 4: Largest demand
‘Largest’ supply
Total no. but the country is home to 20% of the population in the target group. of students enrolled 219m
=
Source: UN Database Source: MHRD
Total no. Considering global distribution patterns of public education expenditure (international PPP$) and population. For the 11 5-year Plan. home to the largest population within the age group 0-24 years.000 Total no. of schools 1.2% of the world’s cumulative public spend. but a closer look reveals that these spends are not only ‘insufficient’ but also ‘inefficient’.IDFC .SSKI INDIA
IES: THE ‘LARGEST’…
Largest capitalized space – annual public spend of $30bn and private spend of $50bn
IES is by far the largest capitalized space in India with government spend of $30bn th (2006.000 higher education institutes (HEIs) in India.. India’s spend on education is highly disproportionate! While countries in North America and Western Europe account for more than half of the global spend on public education.

fall under the purview of the Ministry of Human Resource Development (Department of School Education and Literacy & Department of Higher Education).82% component goes towards capital expenditure. This may be followed by post graduation courses. While India has a network of more than 1m schools. just 37% of target population enrolled
Further. Higher education institutes cater to the ‘18-22 years’ & above age group.0 Estimated Average Years of Education of Citizens (LHS) Public Spending on Education as % of GDP (RHS) 7.0
0
4.0
20
13.
JANUARY 2009
6
.5
5. spends are highly disproportionate
While China spends 2. which eventually translates into ‘ineffective’ infrastructure/ quality of education. The segments are free of any regulations (i. Schools cater to the ‘3-17 years’ age group. a $10bn market has evolved around the formal education segment. coaching classes.0
Even though India spends 3. 66% of these are only till the primary level. a break-up of government spend shows that only a miniscule 0.SSKI INDIA
66% of 1m+ schools only till primary level.0
4.e. multimedia/ IT to schools and colleges (catering to both private and public institutions). Not only that.IDFC .0 USA UK Canada India China Singapore
1. A whopping 80% of the revenue expenditure on teachers’ salaries leaves little to be spent on infrastructure creation.5% of GDP ($30bn) on education.5
Germany
France
China
Brazil
Italy
UK
Japan
USA
India
0. vocational training and the books market. Below we give the broad structure followed by formal IES and the key non-formal segments flanking it. its estimated average years of education of citizens is 10yrs (6 yrs for India)
Source: UNESCO Institute for Statistics database
‘Private’ players – balancing the ‘inefficient’ equation
$50bn private spend – a large opportunity canvas
Given the dismal state that IES (read government-run schools/ institutions) is in.5
10
9. from school to higher education. net enrollment levels are a dismal 37%.
We have divided the private spend of $50bn (IES opportunity) into two segments: Formal ($40bn) and NonFormal ($10bn) IES. Formal IES: The formal educational system in India broadly comprises schools (often classified as K12 – kindergarten to 12th) and higher education (HE) level.5-3 years). HE comprises graduate/ diploma/ professional courses. no governing/ regulatory bodies for this segment). Non-formal IES: The non-formal education segments flanking the formal ones include preschools (1.5
2. With a single governing body (UGC). With no central governing body for K12.
Exhibit 5: IES – an ‘insufficient’ and ‘inefficient’ public education system
30 Public education expenditure (International PPP$ ) GDP (International PPP$) Population aged 5-25 yrs
18. the market for private formal education has grown to a stupendous $40bn in size over the past few decades. they are ruled by state boards/ ICSE/ CBSE/ International Boards. typically perceived as hallmarks of quality (even though quality comes at a price).2% of GDP. In this backdrop. All the levels. consumers are increasingly veering towards private institutions. Inefficiency of the public education system is amply captured in the fact that only 61% of the target group is enrolled in schools and with dropouts as high as 40%.

they dispense education to 40% of India’s total students enrolled.516 84. a bourgeoning middle class (with the intent and ability to spend) and price discovery that the IES has seen over the past decade. a growing young population.000 schools out of the total 1m existing schools are privately-run.400 1.SSKI INDIA
Only 7% of total schools dispense education to 40% of students enrolled
Private institutes in the formal education space (K12 and HE) have proliferated rapidly over the past many decades – and as many as 75.000 20. Increasing affluence has been fostering higher aspirations for India’s populace.750 50. With an inefficient public education system.779 31.110 300 70 90 6.60 0.00 0.194 3.18 12.99 3.110
% share of total
80 40.6% versus consumption growth of 3. As a result. we expect 14% CAGR in private spends on education ($80bn by 2012).000 HEIs are private.49
Revenues (2012E)
65. The $13bn spent annually by Indians on higher education in the overseas markets asserts the pay power of the education-hungry Indians. The importance of private participation is underlined by the fact that even as only 7% of the total schools are private. and the ability as also willingness to pay are guiding its education sector through a phase of price discovery.77 2.00 40.)
…private IES – a USD80bn opportunity by 2012E
JANUARY 2009
7
.
Exhibit 6: Private IES – big growing bigger ($ m)
Formal IES K12 Higher Education* Non-formal IES Preschool Multimedia in private schools ICT in govt schools Coaching classes Vocational training Books Total IES
Revenues (2008E)
40.000 20. Going forward.00 20.250 33.470 19.662 2.608 1. This is despite K12 (schools) being a focus area for the government as less than 10% of the total public expenditure on education is assigned to higher and university education.14 0. refer to page 20 and 21. i.000 10. showing a CAGR of 8. *Higher Education spends include $13bn spent annually to export education
Growing aspirations backed with increasing affluence leading to price discovery…
Spends on private education to increase to $80bn by 2012E: India’s current spend on education is at 5% of average household (HH) income.500 1. 77% of India’s ~18.2% over 1995-2005. we expect the consuming class.858
CAGR (%)
13 14 12 18 36 60 70 15 25 10 14
Source: IDFC-SSKI Research.e.026 459 752 11. Non-formal segments are fast-growing areas of the education landscape – we expect 18% CAGR for them over the next few years against 13% CAGR for the formal education space.000. HHs with annual income >Rs90. (For further details on formal and non-formal segments of IES.IDFC . to burgeon from 28% of the total population in 2002 to 48% in 2010.

of Higher Education Instututes 18.SSKI INDIA Exhibit 7: India spends $50bn annually on private education. estimated to expand to $80bn by 2012.0 IIM A IIM B IIM C IIM K 0. high socio-aspirational value attached to education and increasing affordability have all converged to drive demand for quality education (synonymous with private institutes).7
CAGR 20%
33.15
CAGR 18%
3.4
Private
Public
Fees per annum (Rs m)
1.7% of these schools are private – yet 40% of the students are enrolled Private Public Total no.000 higher education institutes – 77% of them are private Public
Total no.000 2008
1. Inability to transform the businesses into a ‘process-driven’ model from ‘people-driven’. we maintain education is a difficult business to scale – our stand is vindicated by the dearth of scaled-up players in the space.000 1999 40.500
16.000.000
CAGR 12%
0. as also lumpy nature of revenues. The $50bn education market.000
11. the ‘notfor-profit’ mandate has kept profit-driven corporates away from the $40bn opportunity.
IES – up against scalability issues and regulations
While private players have been active in the formal IES for a few decades.CAGR of 8. of schools 1.
8
JANUARY 2009
.15 0.000 7% At 75.2 0. estimated to grow to $80bn by 2012
Play for private
Total no.4 0. of students enrolled 219m 40% Private India has 18.15
1999
2008
Fees per annum (Rs)
44.000 15. portends a great opportunity at hand for wealth creation.1 0.2 0. has materially curtailed scalability in the highly fragmented and largely regional markets.000 77%
+
Price discovery
1.6 0. scalability remains an issue in most pockets.000 -
Private Schools
Coaching Classes
Household spend on education .025. IDFC-SSKI Research
…YET IES A LONG WAY FROM GRADUATION
A failed public education system. BUT the ground reality is in stark contrast.6
22.9 0. While scale is attainable in a few pockets.2% over 1995-2005
US$50bn expected to grow to US$80bn by 2012 (14%CAGR)
Source: MHRD.000
0.6% versus consumption growth of 3.IDFC . In the $10bn non-formal space.

HEIs (Higher Education Institutes): At $6. A ‘priority sector’ status does ensure fund flow to an extent. A student can th th continue to be a part of the education system – or his/ her 10 or 12 grade scores would be recognized – only if he/ she passes out from a K12 institute affiliated to a board recognized by the system.
JANUARY 2009
9
.SSKI INDIA
Formal IES – regulations a ‘big bully’
‘Not-for-profit’ mandate restrict investments in the space
While India has been proactive on liberalization. While a few states confer on schools the right to act as profit-generating entities. schools (also popularly known as K12. i. Hence. they can do so only after evaluating the state laws (e. but the government’s agenda of ‘social inclusion’ has trapped IES in a regulatory maze. while these schools can opt for either a not-for-profit trust or a for-profit company.g. HE is the second largest opportunity in IES. 12% CAGR till 2012E
Higher Education 50.IDFC . IES has remained largely untouched by the reforms process.0%
Regulation mandates institutes to be run as ‘not for profit’ trust or society
Source: IDFC-SSKI Research
K12 schools need affiliation/ recognition by boards for students to be part of education system
K12 segment: At $20bn. Technical education institutes find themselves regulated under various professional councils as well – e. Archaic rules mandate all formal educational institutes in India to be run as ‘not-for-profit’ centers under a society (registration under the Societies Registration Act 1860) or a public trust (Registration Act 1908). in terms of operating structure. AICTE (All India Council for Technical Education) is the regulating authority for engineering and MBA colleges.5bn ($20bn including cash transactions of ~$1.e. from Kindergarten to 12th standard) form a core of the total market.5bn and the $13bn spend outside the country). Haryana allows schools to be run for-profit while most states do not). all K12 institutes have to be affiliated to an education board – either central boards like ICSE and CBSE or a state board. Of late. Any surplus funds generated in the process of running formal schools/ HEIs have to be ploughed back into the same school/ HEI and no dividends can be distributed. a trend has emerged wherein some schools have been seeking affiliations with various international boards such as IGCSE (International General Certificate of Secondary Education) and IB (International Baccalaureate from Geneva).g. HEIs seeking recognition by the apex regulatory authority named UGC (University Grants Commission) also need to be run in the form of a trust/ society.
Exhibit 8: Formal IES – regulations the big bully
A $40bn market. educational boards still demand strict adherence to the not-for-profit structure.0%
K12 50.

Much required structural changes look difficult to achieve
Exhibit 9: Formal IES – structural changes required
What is the issue?
• Regulations require all educational institutions (school or c ollege) to be run as a trust or a society • No div idends can be distributed and the 'reasonable surplus' needs to be ploughed back into the system • More than 75% of the educational institutes (in Maharashtra) are run by politicians. which has proved that a quality institute with strong industry acceptance does not require the stamp of affiliation with these bodies. vocational training. it is difficult for new players to enter and existing players to expand in the space. no regulations formulated for recognizing foreign HEIs under UGC
What needs to change?
• A structural change required to allow for-profit schools and colleges. 15% and books.
JANUARY 2009
10
. High land prices make economics unviable • Even though 100% FDI through the automatic route is allowed since 2000. the market broadly consists of segments that are inherently difficult to scale. the much-required structural change in education does not appear to be in sight. Due to the high involvement of politicians with respect to ownership and the shortage of quality institutes leading to lucrative cash transactions. In fact. Other issues that plague the sector are high land prices and little clarity on FDI pertaining to this space. However.IDFC . scalability can be achieved only in less than 5% of the market while three of the largest segments (95% of the opportunity – coaching class. but industry acceptance is mandatory
With most of these bodies perceived as extremely corrupt and bureaucratic (a typical case of ‘over-regulation but under-governance’).The regulatory bodies need to act as only 'quality contr ollers' and check fly-by-night operators
‘Trust’ Issues
• Strong political will to realign education policies • Vested interests need to take a back-seat
Political Quagmire
Land Blues
• Stat e development authorit ies need t o put a system in place to ensure only genuine bidders get land
Low FDI
• Clear regulations need to be put in place for recognition of foreign universities
Source: IDFC-SSKI Research
Non-formal IES – scores low on scalability
Less than 5% of $10bn non-formal IES offers scalability
While we expect the non-regulated $10bn non-formal market to witness 18% CAGR till 2012. Hyderabad – a premiere business school). Low political will to realign the 'not -for-profit' education system • A large portion of subsidized land demarked for schools is hoarded and resold to sc hools at much higher prices.SSKI INDIA
HEIs can opt to not affiliate to the system. ~64%. an HEI (unlike K12) can do without recognition from these bodies – as long as they are a quality institute with acceptance from the industry (a student typically joins the industry after passing out from HEIs). This implies that 80% (formal IES) of the market potential is not directly exploitable by corporates with profit-driven business models. 17%) offer limited value creation potential. A case in point is ISB (Indian School of Business.

0% Multimedia in private schools ICT in govt 0.3%
A highly fragmented and largely regional space. players in the test prep space – like FIIT-JEE (revenues of Rs1.
Exhibit 11: Coaching class market (64% of non-formal IES) Market ($ m)
6-12 and tertiary education – subject/ concept-based Grad test prep – based on concept application Post grad test prep – aptitude-based Total Coaching Class Market 1.
JANUARY 2009
11
.9%
Vocational Training 14. Mahesh Tutorials (revenues of Rs700m in FY09E) is one of the few coaching class players that have managed to achieve some ‘scale’ in this non-scalable segment. the remaining 20% of the coaching class market has lower dependence on people and a larger focus on national level content. the business ($6.078 216 6. or a low degree of stability and scalability. Career Launcher (Rs900m) and TIME (Rs1bn) – have attained a relatively higher scale.4bn.088 High Low
High dependency on people mars scalability within coaching classes…
Dependence on people
Scalability
Source: Coaching class players.7% schools 0. We believe ~80% of the coaching class market arises from subject/ concept-based school and tertiary level coaching.382 Medium Low Low-Medium Medium-High Medium 5. However. 18% CAGR till 2012E
Books 17.2bn). which implies high dependence on a ‘brand-teacher’. Against this backdrop. coaching classes dominate non-formal IES
Market remains regional and fragmented… India’s non-formal education market is currently dominated by coaching class business (accounting for 64% of the total).SSKI INDIA Exhibit 10: Non-formal IES – failing the scalability test
A $10bn market. making it relatively easier for players to attain scale.3% Preschool 3. which has to be localized to suit the dynamic needs of various institutions and has high dependence on ‘brand teachers’. IMS (Rs1bn). 15% CAGR till 2012E) is inherently regional in nature and person-centric (a peopledriven model). IDFC-SSKI Research
…but 20% of coaching class market scores medium to high on scalability
Notably. ~95% of market inherently difficult to scale Source: IDFC-SSKI Research
At 64% of opportunity.8%
Coaching Classes 63.IDFC .

25% CAGR) accounts for 15% of the nonformal IES pie. management certifications and spoken-English trainings). Educomp Solutions has a lion’s share (~45%) of the multimedia for private schools market and a distinct first mover advantage in the space.IDFC . IDFC-SSKI Research
JANUARY 2009
12
. Though the market is continuously evolving with emergence of a host of new avenues beyond IT trainings (financials. offers value creation potential given that it is highly underpenetrated and a technology-driven model.SSKI INDIA
Hardly any scaled up players within the vocational training market
The vocational training market ($1.7bn. …scalability only in pockets Barring a few like Educomp Solutions and NIIT that have acquired the ‘relevant’ scale. Given the dominance of unorganized segment. ~70% CAGR till 2012E). 9% CAGR). we expect a few relevant players to be able to create scale and value within the nascent organized preschool market ($300m. In the books business ($1. aviation. at market penetration of <11% suggests high potential. scalability remains low. Multimedia for private schools. ~60% CAGR till 2012E). Going forward. and inconsistent revenue flows in the corporate and retail training verticals (trainings is a discretionary spend). ICT (Information and Communication Technology – $90m. there are hardly any scaled-up/ scalable players. but ability to create value is relatively limited in view of L1 bidding followed for award of contracts.5bn. retail. Some scalability has been seen within the coaching class space focusing on the post-grad test prep space (medium-high scalability in our view). the ‘largest’ players across the space are still small. 36% CAGR till 2012E). though currently a small market ($70m. high reusability of books has been instrumental in capping the growth potential for players.
Exhibit 12: Largest players still small
Preschool
Rs253m
Rs240m
Rs60m
Rs60m
(Private) Multimedia/I T in schools
(Listed)
(Private)
(Private)
Rs2861m
Rs932m
Models that promise scale – NIIT and Educomp Solutions
(Listed) Coaching Classes
(Listed)
Rs1200m
Rs1000m
Rs1000m
Rs900m
Rs700m
(Private) Vocational Training
(Private)
(Private)
(Private)
(Private)
Rs10068m
Rs1200m
Rs995m
Rs800m
(Listed) Books Market
(Private)
(Listed)
(Private)
Rs4111m
(Listed)
Source: Company.

thus.
JANUARY 2009
14
.
MUL and Educomp Solution possess the KSFs
Exhibit 14: IQ of MUL and Educomp Solutions
Investability Quotient
Credibility
Management intent & ability Established credibility Scaled-up operations. Funded by Capital ($40m). we believe just a handful of them has it in them to compete in the long haul.SSKI INDIA
4Cs differentiate the ‘men’ from boys
The 4Cs – Credibility. access to Rs7. Capital (built to last). we like Manipal Universal Learning (unlisted) and Educomp Solutions (market cap of Rs42. While the success of Educomp Solutions (among world’s top 15 companies by market capitalization within the education space. Creativity (ability to ‘manage’ the overregulated environment) and Content (ability to differentiate and build annuity). evolved as multi-tiered structures to ‘manage’ the over-regulated environment (Creativity). equip players to attain a higher IQ.5bn (FY08).3bn). We have identified some unique KSFs which. excluding the books market) has lured many a players to join the fray. Content
With few scalable players.1bn (FY08). and offer a differentiated product with strong pricing power as also an annuity pool (Content).IDFC . IDFC Private Equity ($30m)
Content
Differentiate & build annuity
Established credibility over last five decades with world class institutions like Kasturba Medical College
Strong pricing power (a function of high quality courses) and students captive for 3-6 years
Source: IDFC-SSKI Research
Credibility – management intent and ability
A management’s ‘intent’ and ‘ability’ to attain scale and create value are the key factors to determine its IQ in IES. Based on these criteria.5bn of debt in order to fund growth over FY09-10
Credibility
Management intent & ability Manipa l Universal Learning
Capital
Build to last Balance sheet size of Rs24.first mover to implement a product called ‘Smart Class’ in 1267 schools ( 3-5 year lock-in). the lucrative IES market possesses low IQ. which have successfully scaled up their business platforms (Credibility).8bn
A subsidiary (previously EduInfra and EduManage) provides land and services to own schools run under a trust
Educomp Solutions
Balance sheet size of Rs7. according to us. DPS and Raffles
Creativity
Innovative structure
Capital
Build to last
Content
Differentiate & build annuity Creating an annuity pool . managed to create a substantial balance sheet size with financial muscle to fund future growth (Capital). our investment thesis in IES rests on the 4Cs – Credibility (management intent and ability). investments across the value chain & tying up with renowned players like PSBB. Creativity. creating an order book of Rs9. Capital.

937 1. Thus. Euro Kids and Kangaroo Kids are levering their brands to enter into the K12 space.SSKI INDIA Exhibit 15: Educomp within the top 15 education companies (by market cap) Company
Apollo Group Mcgraw-Hill Pearson Plc Benesse Corp Devry Inc ITT Educational Strayer Education New Oriental Career Education Corinthian College Capella Education Raffles Education Mega Study Educomp Solution Skillsoft Source: Bloomberg
Country
US US GB JP US US US Ch US US US SI SK IN US
Market Cap ($ m)
13.
Presence across the value chain and acquisitions – the way forward
JANUARY 2009
15
.714 2.914 4. some players – to expedite scale – are increasingly looking to lever their established credibility in one part of the value chain to other areas of the education landscape.177 6. Coaching class players like IMS are planning to straddle the HE spectrum (vocational training and HEIs). while NIIT is extending its brand in IT trainings to BFSI. and Career Launcher is working on attaining a footprint across the value chain. preschool operators like Kidzee. spoken-English and BPO training segments. Given that most segments of IES offer limited scalability.496 3. Going forward. For example. we see incumbent leaders with strong brands in respective segments scoring over peers. should pass out and be successfully placed within the industry before an HEI creates a brand). consolidation (acquisitions) could be adopted as a way to grow faster in existing and new operations within IES.IDFC . six years.292 965 826 759 683 668
Players with established credibility will score over younger peers
Only a few players have been able to earn credibility in terms of ability to scale. i. brand creation is a tough and longterm game – a minimum of three batches.969 1.017 7.e.824 3.767 1. Players that have managed to do so as also create a BRAND will be at a distinct advantage going forward (in education sector.

Euro Kids. Setting up a K12 school entails a cost of ~Rs100m (excluding land cost) while HEIs require much higher investments (a medical college would typically require Rs4bn-5bn).SSKI INDIA Exhibit 16: Players straddling the value chain in quest of scale
K12 Higher Education Preschools Multimedia in private schools ICT in public schools Coaching Classes Vocational Training Books Elearning
Career Launcher Educomp Solutions Euro Kids Everonn Systems Excel soft Hurix IMS Kangaroo Kids Kid Zee (ETCN) Mahesh Tutorials Manipal Universal Learning Navneet Publications NIIT Ltd Shloka Infotech Tata McGraw Tutor Vista Existing Plans
Source: Company. With very few ‘scaled up’ players across the IES and the entire space having seen private equity funding of only $180m till date. funding key challenge in the capitalintensive space
Education is a capital-intensive business with majority of the formal and non-formal segments requiring heavy upfront investments.
Creativity – ‘manage’ the over-regulated environment
Creative Kids use two-tier structures – a for-profit body extracting surplus from the not-for-profit trust
Taking a cue from independent school-owners ‘extracting’ profits from trusts (schools and HEIs) in the form of lease rentals and management fee. we feel the ability to raise capital is a critical success factor. upfront capex of ~Rs85.
JANUARY 2009
16
. The nascent corporate activity in the formal education space is using a two-level structure to circumvent the ‘not-for-profit’ diktat.IDFC . ‘innovative’ players like Educomp in K12 space are successfully using these structures to scale up. Kangaroo Kids and Career Launcher are also looking to scale up within the K12 space by using similar structures.g. A host of other players like Kidzee. A few businesses in the nonformal space also call for heavy upfront investments – e. Educomp Solutions and NIIT have managed to create a scale built to last. Players like Manipal Universal Learning.000 per school in the ICT business. IDFC-SSKI Research
Capital – built to last
With few ‘scaled up’ players.000300. some players have taken the age-old informal structure to the next level. While multi-layered regulations have meant that 80% of the opportunity (formal education) remains elusive to commercial activity.000 per class per school for Multimedia in private schools and Rs250.

text books etc) to the schools
Source: Company. transportation. Educomp Solutions forms a trust that runs the school’s operations Educomp has two formed two subsidiaries Educomp Infrastructure (69. delivery.
Exhibit 17: Creative Kids – innovative structures
Tier 3
Educomp
E ducomp owns 69.4% in Edu Infra
Educomp owns 68% in Edu Manage
Edu Infra
Edu Manage
Tier 2
Lease rentals
Management fees
Trust (non-profit body generating a ‘reasonable surplus’) Tier 1 Tuition fees Teachers’ Salaries
For each owned school.5% of annual tuition fee and iii) one-time fee of Rs5m per school Educomp School Management (68% stake with Educomp Solutions) provides IP/ content and management services (content.4% stake with Educomp Solutions) .SSKI INDIA
Innovative structures – The ‘innovative structures’ have emerged to break the ‘trust’ issue. IDFC-SSKI Research
JANUARY 2009
17
. In this way. services and infrastructure to the trust in lieu of rental/ fees.5% on capital employed in setting up schools ii) 4. It further creates a subsidiary that supplies land. The company creates a trust (a not-for-profit body) that runs the educational institute at one level.owns the real estate and leases it out to the schools Edu Infra gets: i) Returns of 14. canteen. the entity manages to unlock the ‘surplus’ and distribute it as dividends or use it to fund other ventures.IDFC .

(The transactions have to be done at a fair market value.SSKI INDIA
Clearing the air on ‘Regulatory Ambiguity’
With strong social connotations attached to education. we believe players with the ability to create a differentiated product/ process with annuity business model can break the scalability barrier. However. A first mover in the space. Thus. Educomp Solutions has pioneered a well-packaged product (Smart Class – a multimedia product to aid teaching in private schools) in order to tap the paying propensity. The key highlights are as follows: Regulations governing the K12 space: The CBSE/ ICSE and state board regulations stipulate running of a K12 institution ONLY as a trust or society. The trust will have teachers on the rolls and collect fees from students while the remaining services are outsourced.000 students in campus education and 140. This structure has been in existence for years and has not been challenged. For example. Regulations governing the Higher & Technical Education space: The rules are more stringent here than for K12 as an HEI is simultaneously governed by a central body (University Grants Commission – UGC) and a regulatory body specific to the field of specialization offered by the HEI (e.
JANUARY 2009
18
.g. AICTE for engineering and medical colleges).IDFC .267 schools with a 3-5 year lock-in period and acquired strong revenue visibility (order book of Rs9. In this direction. it is recommended for the trust and the managing company not to be run by the same management and common directors.000 students in distance education programmes.8bn as of Q2FY09). Income from the trust is non-taxable but the ‘reasonable surplus’ (not defined) can be used only for development of the same institution and cannot be distributed as dividends. taking UGC or AICTE’s approval is the prerogative of a University. as if the two parties were unrelated. and that the transactions are done at an arm’s length. Manipal Universal Learning has carved a niche for itself within the HE space and strong pricing power has helped it establish an annuity business model (18. AICTE further has its own set of rules wrt infrastructure and curriculum – in case an HEI fails to comply with the same. we sought views of various industry and legal experts on the survival quotient of these structures. ISB and Amity have been running as not-for-profit structures but without seeking recognition from AICTE.)
Content – ability to differentiate and build annuity
Differentiated product with an annuity model – the ‘right content’ to scale
While education is a difficult business to scale up due to high dependence on people and low revenue visibility. Educomp has implemented the product in 1. The UGC stipulates that the Higher and Technical Education institutions be run as a trust or society where all the infrastructure and capital goods have to be on the books of the university. students captive for 3-6 years). the risk associated with two-tier corporate structures cannot be completely eliminated. Regulations governing a corporate entity providing management services and land/ capital goods on lease to a K12 institution running as a trust: A company set up to offer services and land/ capital on lease can be run as a forprofit body and does not fall under the purview of the school education boards. it is blacklisted (110 universities blacklisted as on date). scale can be achieved with the ‘right’ content/ offerings. However.

Greenfield projects/taking over existing schools.000 2012E 34. joint ventures with developers.SSKI INDIA Exhibit 20: Formal IES – a snapshot
Segment Revenues ($ m) 2008E K-12 (School) •Cater to 3-17 yrs age group 20. Career launcher. Sikkim Manipal University) •Amity •IIPM •ICFAI •Plans to foray – Career Launcher.500
CAGR 12%
•Regulatory overhang UGC (University Grants Commission) mandates all HEIs to run in the form of a non-profit trust •An overregulated space •Large political involvement •Very capital intensive •Time to build brand equity (minimum of 6 yrs )
•Manipal Education (Manipal University. Euro Kids A No brainer? Not yet! •Largest potential among the education space •While regulations are deterrent to most players .500 universities •A low focus area for the government •Abysmally low GER of 9. •Potential opportunity PPP to manage public schools •India is one of the largest importers of education ($13bn is spent every year outside the country for HE) •Demand supply gap .innovative structures are getting corporatized •Healthy margins. IMS
Time to ‘degree shop’? •While regulations are deterrent to most players. providing management services to existing schools Growth Drivers Key risks Key Players Our View
CAGR 14%
Higher Education •Cater to >18yrs age group
20. innovative structures are getting corporatized to work around the trust regulation
•We feel that entities like Manipal Education that have already established scale and a brand have a competitive advantage
Source: IDFC-SSKI Research
JANUARY 2009
20
.000 •Largest population globally (and growing) in the K-12 age group •Inefficient public school system •Increasing preference for private schools •20000-25000 'quality' schools required (NCERT) •Various states demark land at subsidized rates which can be used only for schools.97 •Government indications of opening up medical colleges to ‘for profit’ entities •Regulatory overhangonly a non-profit Trust/ Society can run a school •Rising land prices can lead to large capital investment and low RoCE •Millennium Schools (part of Educomp) •Kid Zee High (Part of ZILS) •Billabong High (Part of Kangaroo Kids) •GEMS (Dubai based) •Plans to foray IMS.IDFC .000
31. an annuity business •Models in the space .NKC estimates the need for 1.

the organized market is likely to grow faster. more popularly known as preschools.
Market to expand 3x to $1bn by 2012E
Preschool market 2008
Total population HHs with income >Rs200. the $300m preschool segment is expected to be a $1bn market by 2012 (36% CAGR) led by low penetration (1 out of 100 preschool-aged children enrolled) and further price discovery. we expect a shift from unorganized to organized (50% CAGR over FY08-12E) •With a host of players crowding the space – we expect to see scalability in a dominant player like Euro Kids and players using innovative models like Kangaroo Kids
CAGR 36%
Source: IDFC-SSKI Research
PRESCHOOL MARKET: MULTIFOLD GROWTH
Playschools. we expect the preschool market to grow on the back of low penetration. increasing prosperity is driving a shift towards the organized segment. Increasing awareness among parents about the benefits of a quality preschool education has been driving penetration levels and price discovery in the segment.246 18. We estimate a target market of 5.000. at a CAGR of 50% over
22
JANUARY 2009
. economics can be challenging for standalone preschools
•KidZee •Euro Kids •Apple Kids •Shemrock •Kangaroo Kids •Tree House •Bachpan •Podar Jumbo Kids •Mother’s Pride •DRS Kids •Sunshine
Play time •A high growth market.SSKI INDIA
PRESCHOOLS: PLAY TIME
A part of non-formal IES. The strategy imparts resilience to the model against high lease rentals besides ensuring scalability. we expect Euro Kids (one of the largest preschool chains) and Kangaroo Kids (an innovative player) to be relevant players going forward.5-3 yrs age group
•Target audience is limited to a 2km radius •Under high lease rentals. While the market is currently highly fragmented and unorganized in nature. of which 12% are currently enrolled. We expect the total preschool market to touch $1bn (on a low base of ~1. are the primary target customers for preschools. Going forward.000 (8%) 2-4 yrs (6%) 2-4 yrs enrolled (12%) Average spend (Rs pa) Market size (Rs m) Market size ($ m) Source: IDFC-SSKI Research 1. increasing paying propensity and organized supply creating awareness about the importance of preschool education. Led by these factors.5m 661. While the scale-up has so far been on the franchisee platform.000 11900 300
Getting more organized
Households with annual income in excess of Rs200.5-3 years age group.low upfront investment by franchisee •Highly underpenetrated market. corporates are increasingly forming JVs with builders/ partners and moving up the value chain by upgrading to K12 schools. we estimate the segment to be $300m in size.700 schools and 200. which form an estimated 8% of India’s total population.000 students) by 2012. Interestingly.IDFC . traditionally cater to the 1. With players planning aggressive rollouts.5m preschoolers. Considering an average annual spend of Rs18.
Exhibit 22: Preschools – a snapshot
Segment Revenues ($ m) FY08E 300 Revenues ($ m) FY12E 1000 Growth drivers •Growth has been largely using the franchisee route . 1 out of every 100 preschool-aged children enrolled Key risks Key players Our view
Preschool •Caters to 1.15bn 91m 5. Within this highly fragmented market. there has been rapid proliferation of organized preschool chains beyond metros and tier 1 cities in the last five years. the organized segment is growing faster than the industry (50% vs 36% CAGR).000 per student (price discovery still in initial stages). we expect the market to expand by more than 3x in size by 2012. A largely urban phenomenon. With low entry barriers. corporate activity has gathered pace and 11 major chains and ~10 smaller players are active in the space.

The trend of rapid rollouts indicates that ‘quality’ supply of preschools is bringing latent demand to the fore.000-45. While Kangaroo Kids is primarily a premium brand at an average annual fee of Rs35.000 preschools over the next two years.IDFC . education major Educomp has forayed into the space under the brand ‘Roots to Wings’ (60 preschools at present) and has also acquired a 50% stake in Euro Kids (~484 centers) for Rs390m. over the last 5-6 years. Tree House. DRS Kids and Sunshine.
‘Quality’ preschools driving demand in the segment…
Players in other segments of the education value chain are also entering this space – e. Kangaroo Kids.
Exhibit 25: A shiny package!
Shift to organized market. Tree House charges an average annual fee of Rs18.000 students). Mother’s Pride. Though the shift is clearly evident. Shemrock.000. seen a shift towards organized players. Kidzee the largest player with 623 preschools
Publication – Economic times Mumbai. Mahesh Tutorials’ (a brand in the private tuitions space) ‘Little Tigers’ and Career Launcher’s (test prep) ‘Ananda’. Bachpan.000. Dated: 25 Apr 2007
These preschools cater to segments across income groups ranging from consuming to affluent. Euro Kids.
…but the market is highly fragmented and regional
JANUARY 2009
24
. Apple Kids.
Publication: Times of India Nagpur. There are 11 major preschool chains in India including KidZee. Podar Jumbo Kids.700 schools catering to 200. Organized players have largely scaled up using the franchisee route (~1. Further. and around 10 smaller players. the preschool market remains highly fragmented and regional in nature. Dated 26 Jun 2008. Despite the increasing share of organized segment (currently 17% of the total market). KidZee (recently renamed as Zee Learn) – India’s largest preschool chain – has set up 623 preschools in just five years since inception and plans to add another 1.g. the largest player (Kid Zee) holds only 7% share of the total market.SSKI INDIA
ORGANIZED MARKET: SUPPLY CREATING DEMAND
The preschool market has.

Listed under ETCN Current network 623-pan India. Ready to access Billabong High schools.includes day care
Source: Company. Opting for a mix of pure franchisee and JV model for better economics.000 in the next two yrs Business model Franchisee model Key strengths Ready access to KidZee High . quality control & lower attrition. IDFC-SSKI Research
Exhibit 27: Organized preschool market in India
Player History Started in 2003 Status Part of Zee group.primarily in North India
Franchisee model Franchisee model JV model. Plans 1. 23 signed up
Euro kids
1997 – JV between Indian Express & Egmont.primarily in South India 90 .primarily in Maharashtra
Started in June 2008
Listed under Educomp
Plans to target 250 centers by endFY09
Franchisee model
8am to 8pm .SSKI INDIA Exhibit 26: Major players – KidZee the largest
Market share Treehouse 3%
Largest player at 34% of organized market and 7% of total market
Kangaroo Kids 4% Shemrock 5%
Others 12% Kid Zee 34%
Apple kids 12% Euro kids 30%
Source: Company. IDFC-SSKI Research
JANUARY 2009
25
.expanding pan India
Started in 2003
Private
55 . 2001 .IDFC .Egmont International Holdings. Denmark bought back shares of Indian Express in JV. 50% preschools (Franchisee model)
Plans to have K12 schools
Apple kids Shemrock Started in 1989
Private Private
200 . now an Indian private co. Egmont exited Euro Kids.9 operational.
Private (50% stake acquired by Educomp)
484-pan India. 6 operational High operating margins due to accounting for nominal lease (promoter owns property) & ability to compete on a price war
Kangaroo Kids
Started in 1993
Private
60 . Plans to have 1000+ schools in next 3 yrs
50% publishing. Niche player expanding to a basic model through 'Brainworks' and mall schools through 'Kangaplay' Primarily owned model
Strong brand in North India Strong brand in western urban areas.

competition is intensifying in this segment. ft/ month)
27-70 290-400 159-317 33-65 45-85 35-50 110-120 45-50 70-160 30-70
Lease rentals – a risk to profitability
Mumbai Delhi Chennai Kolkatta Hyderabad Gurgaon Noida Mumbai Suburban Pune Source: IDFC-SSKI Research
The unorganized neighbor
Unorganized player provides ‘same’ care but at a lower price
With awareness levels still low. the segment caters only to customers who can afford annual fees of Rs20.. lease rent forms the largest expense for running a preschool and can eat into profitability of the business. which further limits the scope of the market.proliferation largely driven by housewife occupation and low capex requirement (levering existing premises)
Preschools are currently being run primarily on the franchisee model. intense competition from the unorganized segment (at considerably lower cost to customer) and increasing competition among organized players.SSKI INDIA
…BUT. THE BUSINESS NOT A CHILD’S PLAY
There is enough demand for preschools (as reflected by the rapid proliferation) and capex requirements are also relatively lower. which means that it is play time for preschool chains. Given the relatively low investment required. Also. the unorganized market provides ‘the same’ care but at a much lower price. However. With more than 80% of the target market still with the ‘trustworthy’ neighbor. ideally has a customer pull within a 2km radius (parents prefer to send toddlers within a limited radius for safety/ comfort reasons).
JANUARY 2009
26
.
Tail wags the dog – rental costs!
.
Exhibit 28: Soaring rental costs – mounting pressure on cost structures City
Bangalore
Increase (%)
15-20 45-60 35-70 15-30 30-55 10-45 70-75 18-20 70-75 15-40
Average rent (Rs/ sq. and housewife occupation that typically does not consider the opportunity cost of lease rentals (schools are being set up on existing premises which otherwise also do not generate returns).
Limit to lever infrastructure for preschool children
Preschools have a limited target area – maximum of 2km radius
Any preschool. Considering the economics of the preschool business.IDFC . the model is fraught with risks including the inability to attract preschoolers beyond a catchment area of 2km. it may take some time before organized players are able to establish the importance of a quality preschool education.
A non-regulated market – low entry barriers
Low entry barriers – increasing competition
The preschool market is non-regulated and hence entails no regulatory barriers for new entrants. high lease rentals. which has so far evolved largely on the back of two factors – low cost of setting up a franchisee.000. however strong the brand.000-45..

ft Activity room/ Play area Reception Pantry Source: IDFC-SSKI Research. the model breaks even at the operational level at a fairly high occupancy level of ~70%.44 0.07 1.25 0.SSKI INDIA
Economics of a preschool
Franchisee model the most favoured…
Except for a few preschool chains (Kangaroo Kids going in for JVs with developers and Tree House with largely owned schools).000 pa) as also some part of the revenues to the franchisor (~20% of total) in lieu of using the latter’s brand name and for the handholding required to run a preschool.200 sq.SSKI Research JANUARY 2009 0.39 14 77 0. all other players have opted for the franchisee model to scale up.54 0. Assumptions: We have assumed a model premise of 1.4 0. ft) 3 classrooms @ 250 sq. Company 1200 70 750 300 100 50
Exhibit 30: One-time capex
…with one-time capex requirement of ~Rs500.25 0.01 0.1
80%
96 2. The one-time capex broadly comprises furniture and fittings cost and excludes brand fee (we have assumed an average franchisee fee of Rs200. ft) Rent (Rs per sq.IDFC .01 0.42 0.Amortized Less Rent Operating profit EBITDA margin (%) RoCE (%) Source: IDFC .000 and lease rental of Rs70 per sq ft.07 1.000. pottery classes. We have assumed three classes and two batches a day.25 0.7
100%
120 3.58 19 116
70%
84 2.01 0.48 0. of students Revenues @max capacity of 20 per class Expenses Less Personnel Cost Less Administrative & Marketing Expenses Less Royalty payable @ 20 Less Franchisee Fee . This has led to a trend wherein most of the preschools are levering the infrastructure for children beyond the age group of 1. Company
(Rs)
400.000 500. ft with rent at Rs70 per sq. breakeven at 70% occupancy
No.
Exhibit 31: Revenue model Occupancy (Rs m)
At annual fee of Rs25. a franchisee has to pay a brand/ franchisee fee (Rs60.000
Furniture and fittings Misc expenditure Source: IDFC-SSKI Research. ft per student is considered optimal).000. Under this model. which is renewable every three years and amortized over a period of three years).
Exhibit 29: Economics of a preschool
Area (sq.4
90%
108 2.000 100.000-70.5-3 years with programmes like mother-toddlers (children aged between 6-12 months) and for activities like dance.07 1. etc (children aged 3 years and above).25 0.0
27
. music.35 0.2 8 39 0.000
Using these assumptions.60 0.0 0.07 1.01 0. (Only 60% of the total area can be used for classrooms and a minimum of 10-15 sq. which translates into a maximum capacity of 20 students per class (thereby a maximum of 120 students per preschool) and an annual fee of Rs25. ft.49 0.

with the preschool population acting as a feed for the higher classes. there has also been a considerable churn in existing franchisors under high rental costs).3bn) Source: Bloomberg
High IQ offered by Euro Kids and innovative players like Kangaroo Kids
Market cap
2.238 642
JANUARY 2009
28
. the model ignores lease rentals – a major cost-head.5-3 year age group for programmes like mother-toddlers (children aged between 6-12 months) and activities like dance. To improve economic viability of the model. Thus. with a large section of the franchisees being run on owned premises. music. New Zealand and UK) and Bright Horizons (USA.SSKI INDIA
IQ: HIGH (SUBJECT TO BENIGN LEASE RENTALS)
A non-regulated space. Going forward.
Exhibit 32: International players in the preschool segment ($ m. preschool chains have largely grown using the franchisee route. The company has signed 400 such JVs with developers and key partners.285 744
Net profit No. is also using a JV model for further scale-up. Also. ABS Learning Centres (Australia. But these models cannot be superimposed on the Indian market as the cost structure and business models are quite different. Kinder Care (USA). Having said that. Europe and Canada) are a few scaled-up success stories among preschool chains. increasing clutter in the organized segment would mean further fragmentation. the limited catchment area for a preschool implies limited scalability per branch. Kangaroo Kids. dominant players like Euro Kids (50% acquired by Educomp) and those using innovative models (like Kangaroo Kids) are expected to emerge as relevant players going forward.
Players levering infrastructure beyond preschools to improve economic viability
However. of branches
112 39 2. some franchisors are seen to be levering the existing infrastructure beyond the 1. preschools are primarily day-care centres while in India they are perceived as early training grounds for children to develop skills and secure admission into a good school. besides expanding through the pure franchisee route. Globally. etc (children aged three years and above).427 907
Revenues
1. Kidzee. also. preschool chains that have their own high schools get a benefit premium over standalone preschools.IDFC . the business for a franchisee runs the risk of becoming economically unviable in a scenario of high rentals (it has been observed that while franchisees keep mushrooming. CY07)
ABC Learning Solutions Bright Horizons (acquired for $1. Euro Kids and Kangaroo Kids among others are upgrading to K12 schools. Globally. Low upfront investment requirements by a franchisee (ideal for housewife occupation) and an underpenetrated market have led to the emergence of a highgrowth market. pottery classes.

IDFC - SSKI INDIA

K12 (SCHOOLS): A NO BRAINER? NOT YET!
K12, the largest segment ($20bn) within IES, is expected to grow to $30bn by 2012 (14% CAGR) on the back of world’s largest school-aged population and price discovery. While dominated by standalone schools and chains confined to charitable, political and religious individuals/ groups, corporate activity is catching up in this annuity business free from recessionary pressure. Though regulations mandate K12 to be ‘not-for-profit’ structures run by only Trusts/ Societies, 2-tier structures (a trust and a managing entity) are being adopted to unlock the surplus as lease rentals, management fee, etc (an age-old practice followed by standalone schools). Going forward, we believe serious players intent on gaining scale and credibility should help dispel investor concerns on under-reporting of cash. The space will realize its full potential the day favourable regulations fall into place. We find ‘commercial’ K12 chains like Educomp Solutions (11 operational schools, 150 planned by FY12), Zee Learn (23 operational, 100 by FY11E), GEMS (6 schools under a management contract) and Kangaroo Kids (6 operational schools) as interesting plays in this space.
Exhibit 33: K12 – a market snapshot
Segment Revenues ($ m) 2008E K-12 (School) •Cater to 3-17 yrs age group 20,000 2012E 34,000 •Largest population globally (and growing) in the K-12 age group •Inefficient public school system •Increasing preference for private schools •20000-25000 'quality' schools required (NCERT) •Various states demark land at subsidized rates which can be used only for schools. •Potential opportunity PPP to manage public schools •Regulatory overhangonly a non-profit Trust/ Society can run a school •Rising land prices can lead to large capital investment and low RoCE •Millennium Schools (part of Educomp) •Kid Zee High (Part of ZILS) •Billabong High (Part of Kangaroo Kids) •GEMS (Dubai based) •Plans to foray IMS, Career launcher, Euro Kids A No brainer? Not yet! •Largest potential among the education space •While regulations are deterrent to most players - innovative structures are getting corporatized •Healthy margins, an annuity business •Models in the space - Greenfield projects/taking over existing schools; joint ventures with developers; providing management services to existing schools Growth Drivers Key risks Key Players Our View

CAGR 14%

IDFC-SSKI Research

K12: THE LARGEST IN IES
Schools need to be affiliated to a board for its students to be recognized by the education system

Schools, globally known as K12 (Kindergarten to 12 grade), come under the formal education space. These schools broadly address education needs of students between the age group of 3-17 years. Some states in India follow the system of K-10 + 2 (in which case, the last two years form a part of higher education). Following a preschool stint (an optional course), a child has to be enrolled in a recognized school (affiliated to/ registered with either a state board or central boards like ICSE/ CBSE) in order to be considered as a part of the formal education system.

th

JANUARY 2009

29

IDFC - SSKI INDIA

Public K12 schools – short on efficiency
A quality and quantity gap in K12

Globally, India has one of the lowest enrollment and highest dropout ratios, translating into net enrollment levels among the lowest in the world. The 1,025,000 schools in India are clearly not enough to meet the demand in terms of both quality and quantity. Notably, 66% of these schools are only till the primary level. With only 132m (37%) of the Indian K12 population net enrolled in schools, the system has apparently failed. According to NCERT, at least 200,000 schools are required to plug this gap.
Exhibit 34: High dropout rates Enrolled
Grade 9-12 Grade 6-8 Grade 1-5 37 52 130

drop out rate*
62 50 29

no. of drop outs(m)
23 26 38

net enrolled (m)
14 26 92

Total 219 132 Source: Selected Education Statistics 2004-2005, GoI, IDFC-SSKI Research; Note:*The drop-out rate represents percentage of pupils who drop out from a given grade or cycle or level of education in a given school year. There are certain limitations of this method in providing precise estimates, as it does not take into account the data on repeaters

Private market – large is attractive…
Largest K12 aged population globally (5.5x in US) form the largest $20bn opportunity in the space

At 361m, India has the largest population globally in the K12 age group (5.5x USA’s K12 population). Despite a mere 37% of the K12 age group net enrolled on school rosters, private spends on K12 schools stand at an astounding $20bn – which makes the segment the largest within IES. The large market can be explained by a consistent shift towards private schools – catalyzed by the absence of quality public schools and growing awareness about importance of quality education as also increasing ability and willingness of Indians to pay.
Exhibit 35: Largest K12 population globally – a young India versus greying countries
India has the largest population in the age group 0-19 yrs 2008 500,000,000 2015

400,000,000

300,000,000

200,000,000

100,000,000

India China US UK Brazil Japan

Source: US Census International database

JANUARY 2009

30

IDFC - SSKI INDIA

Out of the total 1m schools in the country, ~75,000 are private. With considerable preference for private schools, the average number of students in a private school stands at a much higher 1,200 versus 146 for a public school. The private schools can be classified into private aided (that receive aid from the government in order to run the school), private unaided standard and private unaided premium schools. The private aided schools charge an average fee of Rs5,000-6,000 per annum till the primary stage (5th grade), after which students are charged a nominal fee. The private unaided standard schools charge an average tuition fee of Rs10,000 per annum while private unaided premium schools charge Rs15,000 (up to Rs45,000 per annum in some cases). We estimate an annual total spend of $3bn in the private aided segment and $18bn in the private unaided segment of K12.
Exhibit 36: Market size – private K12 segment
Average no.

With aspirations and awareness meeting affordability, the K12 segment is in a price discovery phase. To put this in perspective, Jamnabai Narsee Monjee School – a premium and prestigious private school in the suburbs of Mumbai – has shown a 12% CAGR in annual fees over the last 10 years. The school has recently also started an IB (International Baccalaureate) division which charges an average annual fee of Rs600,000. The relatively new trend of international schools is catching up slowly but steadily across the country with K12 fees ranging from Rs500,000-800,000 per annum. This underpins the increasing paying propensity of the Indian populace. Pay ability of education-hungry Indians is also indicated by the growing preference for private schools – 40% of students enrolled in the K12 system attend private schools, which are just 7% of total schools in the country. With public schools unlikely to become efficient in the near future, we expect the shift to continue.
Growth in private unaided schools
Percentage of secondary schools under different managements 50 40 30 20 10 0 FY94 FY97 FY98 FY99 FY02* FY03* FY04* FY05* Govt+Local body Private aided Private unaided

40% of students within 7% of schools (private)

Exhibit 37: K12 – 40% of students attend 7% of schools (private)
Total no. of schools Privately run schools Private aided Private unaided Private unaided premium Private unaided standard Public Total children (up to grade 12) No of students enrolled in public and private No of students enrolled in public No of students per public school No of students enrolled in private No of students per private school Source: MHRD Website, IDFC-SSKI Research 1,025,000 75,000 30,660 44,400 15,000 29,400 950,000 361m 219m 139m 146 90m 1,200

JANUARY 2009

31

surplus money generated by one school cannot be transferred to the parent society administering the school and has to be kept for that very school). Thus. The rationale given is that if a society/ trust running schools has to ring-fence each school separately in a financial sense.
Exhibit 38: K12 – a $30bn market by 2012E-change to 14%
K12 Market @ 14% cagr
60
45
K12 – a $30bn market by 2012E
30
15
2008 2009 2010 2011 2012 2013 2014 2015
Source: IDFC-SSKI Research
THE ‘BIG BAD’ CORPORATE: RULED WITH AN IRON HAND
Schools have to run as a trust and cannot distribute profits
Education has strong social connotations in any economy (more so in India). we expect K12 to grow to a $30bn market by 2012 (14% CAGR). We see this as a perfect example of missing the woods (increasing the supply of highquality education) for trees (keeping fees as low as possible in each and every school). In this backdrop. in a 2:1 majority judgment delivered on 27 April 2004 – ruled that the Society or Trust running a school CANNOT invest the surplus generated in running that school in another school (i. Regulations like these have prevented the emergence of any major chains in the K12 space as a corporate running various schools cannot create a common pool (internal accruals) to be used across schools of that particular chain and every new school/ branch opened requires fresh capital infusion. Driven by such price discovery and growing acceptance of private schools as the medium for quality education. it has no reason to try and generate a surplus in any school (translating into low tuition fees in each school). it has always been mandatory by regulation that all schools be registered as a trust or society. or even invest the surplus to fund another school (refer to the judgment in the Modern School versus Union of India case given below). the surplus generated is necessarily to be used for running the same school and only towards its development. Justice SB Sinha and Justice SH Kapadia.e. costlier) schools.
Modern school vs Union of India: Missing the woods for trees?
A three-judge bench of the Supreme Court – comprising Chief Justice VN Khare.IDFC . Further.SSKI INDIA
Consistent shift towards private unaided schools
Within the private K12 space.
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32
. schools have traditionally been a state responsibility to be run with a ‘noble’ cause and without being tarnished by the ‘ulterior motive’ of making monetary profit out of the activity. This clearly indicates that more and more parents now prefer to spend substantially higher amounts in their quest for better quality of education for their children. the educational trust/ society cannot distribute dividends. also. and is not allowed to transfer funds from one school to another.e. the last decade has seen a gradual shift from private aided to private unaided (i.

it needs to secure an NOC from the state and has to abide by any additional rules imposed by the state. the boards mandate the schools to be run as a society/ trust.IDFC . hence. While states may or may not relax the ‘not-for-profit’ stipulation. The salaries need to fixed as per the 6th Pay th Commission (that implies a 40-70% increase on 5 Pay Commission levels). whether owned or leased for a minimum period of 30 years. D) Non-proprietary character of the Trust or Society running the school (to be shown by way of an affidavit)
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th
33
. Land is demarked by state development authority for schools and auctioned at a significant discount to market price NOC from state (for affiliation to any board)
Step II
Step III
Step IV
Construct school (~20 classes) and start operations within a year
Step V
Apply for board affiliation when first batch of 6th grade commences
School boards in India
State Education Boards CBSE The Central Board of Secondary Education CISCE The Council for the Indian School Certificate Examinations NIOC National Open School (stop-gaps for the schooling systems) IB International Boards such as IB (International Baccalaureate from Geneva) IGCSE International General Certificate of Secondary Education
Source: CBSE Website
Once a school crosses the elementary level (8 grade). A student can continue to be a part of the education system – or his/ th th her 10 or 12 grade scores would be recognized – only if he/ she passes out from a K12 institute affiliated to a board recognized by the system. acceptable lease period is a minimum of 30 years). While a school can be affiliated to any board. charitable or religious societies having non-proprietary character or by Trusts (some states like Haryana do not follow this structure and allow ‘for-profit’ activity in the segment). schools are mandated to be established by societies registered under the Societies Registration Act 1860 of the Government of India or under Acts of the state governments as educational. C) Availability of well-qualified staff as per qualifications detailed. In order to get the NOC and affiliation to a board.SSKI INDIA
School ‘rule book’
No central regulatory body – Indian boards mandate a trust structure.
Exhibit 39: School rules – very stringent
Step I Formation and registration of society/trust Minimum one acre land is required. all K12 institutes have to be affiliated to an education board – either central boards like ICSE and CBSE or a state board. while states may/may not
With no regulatory central body governing the K12 space. Payment of salaries to staff cannot be less than the corresponding categories of state/ central government employees. Checklist for securing affiliation from a board (CBSE) The school needs to fulfill the following essential conditions A) ‘No Objection Certificate’/ Recognition Letter from the state government B) Ownership or lease of requisite land in the name of the school or Society/ Trust running the school (if the land has been taken on lease. regulations vary from state to state. it needs to be affiliated with a Board of Education in order to conduct 10th and 12th grade exams for its students to be accepted for jobs or higher studies.

etc to extract the surplus stuck in the trust. At another level. Taking a cue from these schools. The model runs the risk of being struck down in view of education being a ‘socially sensitive’ sector.SSKI INDIA
If there’s a rule. political and/ or religious groups – including Vidya Bharti schools (affiliated to the right wing political organization RSS) with more than 18. companies like Educomp Solutions have created a structure wherein a trust (non-profit body) is created to run the school at one level. the ‘surplus’ profit flows to the latter entity in the form of fees for providing these services and is at its disposal to be then distributed as dividend or used to fund another venture. In order to own and operate schools. services and infrastructure for a rental/ fee. In this way. the structure has been in existence for a long time at the standalone school level and we believe the model could become the norm till regulations change for the better. when corporates looking to set up large for-profit chains have been cautious to tread here.
Two level structures – company supplies services/ land to trust
Exhibit 40: Innovative structures getting corporatized
Company Tier 3
Subsidiary (Infra) ABC Trust (Non profit body generating a ‘reasonable surplus’) Innovative structure have evolved
Subsidiary (Manage) Management fees ABC Trust (Non profit body generating a ‘reasonable surplus’)
Subsidiary (H/W suppliers) Equipment and hardware fees
Tier 2
Lease rentals
Tuition fees
Teachers’ Salary
Tier 1 Tuition fees Teachers’ Salary
Source: IDFC-SSKI Research
JANUARY 2009
34
. individual schools have been ‘profit-making’ propositions since long. However. Dayanand Anglo Vedic (DAV) schools with >600 schools and Chinmaya Vidyalaya with 75 schools among others. which bypasses the ‘trust’ regulation and enables promoters (on corporate level) to generate profits from the venture. DPS (Delhi Public School) with its 120 schools – 107 in India and 13 outside – is a franchisee chain. more so at K12 level. The entities have been using indirect means like lease rentals. Most schools in India are standalone and any chains till recently were usually set up by private charitable. IES has been witnessing some corporate activity in the K12 space on similar lines.IDFC .000 schools. but in formal version of these age-old structures. the company creates an entity that supplies the trust with land. Two-tier structures – a norm in the making?
Corporate structures take a cue from existing ‘nonprofit’ schools
Ironically. Archaic regulations have been surmounted through an innovative two-tier structure. there must be a way to bend it!
Non-profit mandate keeps serious for-profit players away
The not-for-profit mandate is the single-largest deterrent that has kept serious corporate activity at a bay in the otherwise attractive K12 segment. management fee.

prohibitive land costs (Rs170m-180m for a 1-acre plot in Delhi
35
JANUARY 2009
. however.part of Kangaroo Kids (KKEL) Part of Educomp Solutions Listed
6 schools operational. plans to have 150 schools by FY12 Various models . Most of these companies are using a mix of franchisee and owned-schools in order to scale up.33 in Middle East. UP). 6 in India Comments Franchisee model . Thus. 6 signed up
Plans to foray into K12
Source: IDFC-SSKI Research
Models in the core K12 segment
Various models are being used by for-profit players to gather scale in the segment. Career Launcher (operational in the test prep space) and various other players are reportedly soon to enter the segment. is now aggressively extending itself across the value chain with 11 K12 schools operational and plans to set up 150 schools by FY12.
Players going in for greenfield projects/ ‘taking over’ existing schools
Owned Schools: Within this model. Various players that have created a brand in non-formal areas of education have extended footprint into the K12 segment.growth via greenfield projects/ conversion model. For a greenfield project. Similarly. companies either set up greenfield projects or take over the trusts of existing schools for a consideration (Educomp has recently acquired a residential school in Mussoorie.SSKI INDIA
Chain reaction
Players across IES eyeing the space
More recently. Further. a school can apply for subsidized land reserved for schools by the state development boards. companies are also looking at an alternative option of providing management services to existing schools. GEMS plans to have 100 schools in India (including owned)
Private
Private . 14 signed up 11 schools operational. Further. Within the franchisee model. planning to have 100 schools by FY11) and Kangaroo Kids (six operational schools) – too have moved up the value chain and forayed into this large market. managed and JVs with reality players
Private
Plans to foray into K12
Private
3 schools in Delhi
Plans to foray into K12
Private
4 schools operational. to bypass the ‘trust’ regulation and extract profits without breaking any rules. earlier a pure multimedia supplier to schools.IDFC . some players in the preschool segment – Kid Zee (nine operational schools. K12 has witnessed increased corporate activity – mostly based on the two-tier structure.
Exhibit 41: Key players in the K12 segment
Player Status Part of the Zee Interactive Learning Solutions (ZILS) – Listed Network 23 schools currently. expects to grow the base to 100 schools over next 3 years 80 schools across the globe . companies are helping schools set up the twotier structure.owned. wherein companies take over an existing school Management contracts – wherein the company provides only management services. a big chunk of this land has been hoarded and leased/ sold to schools at high rates. Educomp.

resting with Educomp). 80 schools worldwide) is following this model to gain a foothold in India. No capex for Educomp.SSKI INDIA
DDA). Besides these two models.000 students.
ECONOMICS IN SCHOOL: HEALTHY MARGINS
~Rs100m (ex-land) required to set up a 2. ft). have hurt the economic viability of a school under this model. coupled with high construction costs. ft. hiring. admissions.
Tie-ups with real estate developers to neutralize effects of land costs
To improve economic viability. This model is prevalent in the US (charter schools). ft per student.5bn in a subsidiary Knowledge Tree Infrastrcuture (KTIL) and is expected to roll out 15-17 schools over the next 3-4 years. Dubai-based GEMS (Global Education Management Systems. to manage the schools for a fee
Source: IDFC-SSKI Research
Management contracts – a pure services model
Managing schools: Management of existing or new schools is another model being used by private players to capitalize on K12’s market potential.000 student capacity school
K12 is a capital-intensive business and requires a hefty one-time investment of ~Rs100m (excluding land cost) to construct and furnish a school with a capacity of 2.
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36
.200 per sq. a school generates consistent returns with little or no incremental capex required. more so as the payback period is long and IRRs are low. many entities adopting this model are setting up schools in joint ventures with real estate developers. CBSE requires a school to either own the land or have a 30-year land lease on a minimum 2-acre plot. Under the agreements.
Exhibit 42: Indicative strategic tie-ups under the owned school model Developers
DLF Ansal Properties
Model
Educomp to purchase land which will be at a discount to market price. Players like Educomp too have entered into contracts for managing schools. we have assumed 30 sq. we have assumed an average cost of Rs32m per acre (or Rs750 per sq. An annuity business. Under the model. and advertising and offers products or processes (IP of the company) in lieu of a management fee. Educomp has entered into two strategic tie-ups with DLF and Ansal Properties. ft per student to accommodate larger classes and halls at a construction cost of Rs1. while Educomp gets land at a significant discount to the market price from DLF (capex. While CBSE regulations mandate an area requirement of 25 sq. another potential model or opportunity in the K12 space that could unfold for private players is managing of government schools (outsourced for a fee). This is a win-win situation for both the parties as quality schools within residential complexes make the properties more attractive and the corporate entities running the schools do not have to commit huge funds for acquiring land.IDFC . a company undertakes the day-to-day operations. Below we give indicative economics of running a school. As plots of land are reserved by the state development boards for educational institutions and are available at a considerable discount to the market price. Land cost is the other key one-time component for developing a school. the tie-up with Ansals does not entail any capex on Educomp’s side (it just manages the school for a fee). and hence assets. DLF will not commit any funds Ansal to invest Rs2.

000. While ‘regulatory ambiguity’ and under-reporting of cash generation (and absorption) emerge as concerns for investors.
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38
. and lowering incremental funding requirements).We deduce from our interaction with industry sources that a school can generate healthy EBITDA margins of ~40%.SSKI INDIA
Capacity build up takes around four years
We have assumed a capacity build-up over the first four years of operations (30% in year-1. players with credible management have high IQ
At $20bn. K12 is the largest opportunity within the IES. an asset heavy model. healthy EBITDA margins and annuity cash flows (coupled with a negative working capital cycle) make K12 a value creating proposition.000 per annum and a one-time admission fee of Rs25. corporate structures have found a way around regulatory deterrents and we expect to see increased activity in the space going forward. Zee Learn (23 operational. under-reporting of cash key issues. we assign high IQ to K12 schools run by a superior and credible management. 100 by FY11E). 70% in year-3) with two sources of revenues – annual tuition fees of Rs30. While the true potential of this space will be unlocked with a change in regulations. Land cost is the key variable and could swing the breakeven period considerably.IDFC . 150 planned by FY12). Educomp Solutions (11 operational schools. (the admission fee is paid upfront and the annual fee is paid on a quarterly basis leading to a negative working capital. Notably. GEMS (6 schools under a management contract) and Kangaroo Kids (6 operational schools) are a few scalable and noteworthy players that have emerged within this space.
IQ: HIGH
Regulatory ambiguity. 50% in year-2.

With 75. We have estimated the currently nascent market at $70m and expect it to grow swiftly (~60% CAGR) as less than 5% of private unaided schools have been tapped. which makes the proposition economically beneficial for the latter. we expect the momentum to continue for some time on the back of the currently low penetration •Educomp has a str ong first mover advantage with Smart Class
Source: IDFC-SSKI Research
Schools get tech-savvy fast!
Audio and visual (2-D & 3D digital educational content) used as teaching aids in private schools
Private schools are working on evolving and improving their teaching delivery mechanisms by going beyond the traditional chalk & talk. Everonn Systems and NIIT are the largest players within the space.Kyan •Plans to foray : Navneet . With a host of players swarming the market. the market offers a potential in excess of $1. some schools even get a revenue share.Smart Class •Everonn – Vitel s •NIIT – EGuru •IL FS .400 unaided).
Exhibit 45: Multimedia in K12 market – a snapshot
Segment Revenues ($ m) FY08E 70 Revenues ($ m) FY12E 500 Growth drivers •5% of private unaided schools have been covered – a highly underpenetrated market •Market potential in excess of $1. While implementation of such products adds to differentiation and ability to charge higher fees by private schools.IDFC .000 private schools (44. Educomp Solutions’ Multimedia product for schools) have created a market for a complementary teaching delivery mechanism beyond the traditional black board (multimedia uses 2-D and 3-D images to explain concepts to enhance effectiveness of teaching).5bn •Existing model set to witness high growth due to infinite return on investment for sc hools •An annuity model CAGR 60% Key risks Key players Our view
Multimedia in private schools •Providing technology as an aid t o chalk & talk in K12 classrooms under the BOOT model
•Large upfront investment •Duplication of content
•Educomp .SSKI INDIA
MULTIMEDIA IN K12: BEYOND CHALK & TALK
Increasing need and awareness for ‘quality education’. the trend is gaining acceptability as the model does not require schools to invest any capex or incur operating/ maintenance expenses.
No capex or opex on schools’ part
Educomp Solutions is the most scaled-up player
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39
.5bn. Educomp Solutions has been the first one to establish relevant scale in the space and has a strong first mover advantage (251% CAGR in revenues over the last three years).Ebook
Beyond chalk & talk! •A high growth market. Educomp Solutions. With multimedia companies charging students directly. willingness to spend in the K12 segment and an aggressive supply (254% CAGR in schools over FY05FY08 for Smart Class. Multimedia in schools uses digital educational content and infrastructure solutions as a teaching aid in classrooms by using audio and visuals means across various subjects.

Educomp Solutions has pioneered Smart Class – a high-return and annuity business model. should be attached with the school server for access to the modules
Source: Company. Each Smart_Class room has a plasma TV.
The knowledge center server is connected to the existing classrooms through a campus wide structured Ethernet network. The cd content is encrypted and has a hardware lock. The blackboard can slide over the plasma TV enabling the teacher to switch between the black board and the plasma TV. A full time Resource coordinator is deployed by Educomp at the knowledge center to train and support teachers to work with the program. we have used Smart Class as a benchmark to understand the economics of multimedia in schools.
The required content is sent to the school written on a CD which is then uploaded on the server in the knowledge center.
The classrooms are converted to Smart_Class rooms. or only IT subject training to a complete subjects solution are jostling for space.IDFC . The hardware unlock code is with the resource coordinator.
Smart Class Model
A widely accepted product in the Multimedia for schools space is Educomp’s patent ‘Smart Class’.SSKI INDIA
A high returns business
Smart Class a benchmark within the industry
While various products – from purely content-based to complete interactive solutions (content & hardware). Competitors are increasingly adopting the model – hence. IDFC-SSKI Research
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41
.
Exhibit 48: Smart_Class Mechanism
Source: Company
Exhibit 49: Smart Class Mechanism
An existing room/space inside the school campus is converted into Smart_Class Knowledge Center.

SSKI INDIA
A BOOT model. While it does not involve any capital/ operating cost at the school’s end. at Rs 150 per student per month. we see the pioneer Educomp Solutions (with a strong content library and wide distribution network) well placed to sustain its dominance in this market. renewal of such contracts may be a challenge after the initial contract period is over. Key risks in the segment are duplication of content and excessive competition. of students per class Revenue per class pm (Rs) EBIT (Rs) EBIT margin (%) Investment per class (Rs) RoCE (%) Source: Company. Companies typically charge on a per student basis (average Rs150 per month. digital content for teaching and maintenance services.
Exhibit 50: Economics for Smart Class
Revenue per student pm (Rs) No. While upfront capex is high (Rs85. IDFC-SSKI Research 150 40 72. infrastructure is transferred to the school at a nominal cost at the end of the contract period.000 per class). However. fee of Rs150 per student per month
The multimedia in schools business commonly works on the BOOT (Build-OwnOperate-Transfer) model. The existing model followed by Educomp Solutions (Smart Class) and Everonn Systems (I-schools) leads to high return on capital employed and an annuity revenue stream as most of these products have a contract (3-5 year lock-in) with the schools. contract for 3-5 years. as the infrastructure has to be transferred to the schools and content can be duplicated.IDFC . Increasingly players like Educomp Solutions and Everonn Systems plan to implement this model with a digital white-board and projector model to lower the capex costs by ~20% and further improve the RoCE. Schools opting for this product enter into a 3-5 year duration contract with multimedia-product suppliers that provide infrastructure. Going forward. The business offers good returns – Smart Class generates EBIT margins of 58% and a high RoCE of 49%. the capital cost is recovered in a little over a year. usually payable quarterly).000 41. high RoCE business
IQ: HIGH
Technology based model and an underpenetrated market ensure scalability
The segment offers a high value creation proposition as a technology-based product and an underpenetrated market ensure scalability.000 49
High margin.760 58 85.
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42
.

000 schools expected to be up for bidding in FY09) and low market penetration (currently 11% of total public schools). we expect this market to exhibit ~70% CAGR in the years to come.
Exhibit 51: ICT in public K12 – a snapshot
Segment Revenues ($ m) FY08E 90 Revenues ($ m) FY12E 750 Growth drivers •Underpenetrated market with 11% of government schools covered •Government to increase spends (allocation for SSA increased 4X in 11th Plan) • 29. we expect spend on ICT to rise in line with the increasing allocation on SSA. is opting for public private partnerships (PPP) to source IT infrastructure and training.000-300. we expect $125m to be spent on ICT out of the total SSA funds of $3.000 schools expected to be up for bidding in FY09 CAGR 70% Key risks Key players Our view
ICT in public schools •PPP in education •Providing IT infrastructure and training •Funded by Centre/ states under Sarva Sikshiya Abhiyan (SSA)
•Large upfront investment •L1 bidding leading to commoditization & low margins •Long receivables cycle
•Educomp •Everonn •NIIT •Compucom •Core Projects •Various Regional Players
Gains but with pains •An underpenetrated market.SSKI INDIA
ICT IN PUBLIC K12: GAIN BUT WITH PAIN
The government. ICT is being implemented in schools through the PPP route. a host of regional players are also active in the space. To date. The contracts are awarded to players on L1 bidding basis. 6x higher than in the 10 th Plan period). A part of this outlay ($18bn.000 per lab) and a long receivables cycle (150-200 days). We expect the nascent $90m ICT (Information & Communication Technology) market to grow 10x by 2015 (penetration below 11% of public schools). a multipronged initiative to weed out inefficiencies in the public education space and upgrade education by including computer literacy (ICT). various states have auctioned ICT contracts to private suppliers for ~100. with the aim of improving computer literacy in public schools. which implies no product differentiation and hence commoditization. NIIT and Compucom are the largest players. The efforts are in earnest as is shown by the Centre’s increased allocation of th th spend towards education in the 11 Plan period ($68bn. Though the scale of opportunity is large.IDFC .3bn for FY09. Everonn Systems. With 60% of the spend committed to SSA by the state governments provided by the Centre. the opportunity is large enough to build scale •L1 commoditized business with low RoCEs.
The underpenetrated market expected to grow to ~$750m by 2012
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43
. While Educomp Solutions. leads to low value creation c apability
Source: IDFC-SSKI Research
Public schools proactively adopting technology
Increasing SSA spend (up 4x in 11th Plan) means higher allocation for ICT
The government is taking concrete steps to improve the quality of public education system. 4x higher than in the 10 Plan period) would go to SSA (Sarva Shiksha Abhiyan). it is a low-margin business with high upfront investment (Rs200.000 schools (indicating a market size of $90m). With the government increasing spend for ICT (29. In the coming years.

High upfront investment of ~Rs300. private companies are lining up to service the demand. an ICT player has to commit a one-time investment of ~Rs300. Also. High capex per lab per school: ICT contracts are structured in a way that companies have to provide the entire infrastructure at the beginning of the contract period. wherein the government pays upfront (at the beginning of the contract) for the hardware.
A 5-year contract is typically valued at ~Rs1m with capex requirement at ~30% of contract value
Economics of the business
A pure hardware contract generates ~13% RoCE
On a normative basis. which bring in higher revenues and better RoCE. While the payment-release cycle time by state governments has become shorter of late.000 13%
Key concerns
Even though the segment offers high growth potential. Against this.
Exhibit 52: Economics – hardware and service contract
Value of contract Period of contract Average revenue per lab pa EBIT EBIT margin Investment per lab (30% of Value of contract) RoCE Source: Industry. The contracts are awarded to 2-3 private players based on L1 and TI bidding. While some state governments follow the ‘outright buy’ model.000 (~30% of the contract value) for setting up a lab and incur the recurring running and maintenance costs.000 per school per year). the following issues make the business less attractive for players: • L1 contracts imply lower margins and commoditization: The contracts follow an L1 bidding process.IDFC .000 per lab
•
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44
. which improves with pure services contracts and extensions of existing hardware contracts into service contracts. However. tenders are floated by state governments for a number of schools in a district.000 20% Rs300. the contracts are commonly structured as BOOT contracts for a period of 3-6 years. a private company sets up infrastructure of computers in labs (one lab per school). ICT payments are cleared on quarterly basis throughout the duration of the contract at a predetermined contract value (estimated at ~Rs200.000 Rs40. IDFC-SSKI Research Rs1m 5 years Rs200. an ICT contract generates ~13% RoCE. For awarding the contracts. increasing competition would exert further pressure on margins.SSKI INDIA
ICT mechanism – low RoCE
Based on L1 & TI bidding. commonly structured as BOOT model
With government’s increased focus on computer literacy in public schools. some contracts have additional software and services. Further. receivable days are still high at 150-200 days.
Average receivable days at 150-200 days
•
Long receivables cycle: The contract terms typically stipulate payment release on quarterly basis. some players have decided to shift their focus from ICT to other opportunities in the space. Given the asset-heavy nature of the business (investment of ~Rs300. In most contracts. which means a longer receivables cycle. and provides maintenance services and training. which leaves no room for product differentiation.000 per lab per school). Unlike the per student per month revenue in private schools. payments invariably take longer than a quarter to be released.

652 2. the L1 bidding process followed for contracts and a long receivables cycle imply low RoCE of ~13%. IDFC-SSKI Research
No.000
Companies
Educomp (2.004 3.000 schools in the public domain) would continue to be dominated by leaders like Educomp Solutions. On the positive side. Also. of schools with ICT (till FY08)
6. of schools
4. and thus limited value creation capability.164 4.860
We expect dominant players to grow faster
Even though the space is getting crowded with entry of new organized as also regional players in the segment.075 1.
Exhibit 54: Each ICT contract divided among players States
Gujarat Karnataka West Bengal Andhra Pradesh Source: Companies. Everonn (1. Yet. there are a host of regional players in the segment. we believe the market (11% penetration among the 950. with the Centre bearing ~70% of the cost on ICT.e. Educomp (50) Everonn (555). Various players also manage to generate higher RoCE by opting for non-investment contracts (i. IDFC-SSKI Research
No. Educomp (500) NIIT (663). Aptech (250). the high capex requirement per school would prevent a monopoly situation (every contract divided among 2-3 players).000 1. Aptech (154)
JANUARY 2009
45
.
Exhibit 53: Key organized players in the ICT space Players
Educomp Everonn NIIT Compucom Source: Company. payment cycles too have improved.IDFC . NIIT and Everonn Systems. Everonn (183). the government has changed the bidding process from exclusively L1 to a mix of L1 and T1 (technical bidding).817).256) NIIT (700). Further. While organized players form ~2% of the total market. dynamics of the small but high-growth ICT segment allow players to scale up.SSKI INDIA
IQ: LOW
Economics improving but low value creation potential
Unlike most segments of the IES. purely service contracts without deploying hardware).055 1.

IDFC . there are 24 Central Universities maintained by the Centre.500 •India is one of the largest importers of education ($13bn is spent every year outside the country for HE) •Demand supply gap .g. we believe Manipal Universal Learning (equipped with the 4Cs) is the only player in the space promising value creation potential. hefty investments required to set up an HEI and longer gestation cap IQ of the segment. with 12% CAGR estimated over FY08-12. each stream is monitored by an apex body (e. IMS Time to ‘degree shop’? •While regulations are deterrent to most players.
Exhibit 55: Higher Education market – a snapshot
Segment Revenues ($ m) 2008E Higher Education •Cater to >18yrs age group 20. Considering the $13bn spent on importing education. Sikkim Manipal University) •Amity •IIPM •ICFAI •Plans to foray – Career Launcher.5bn market (excluding $1.500 universities •A low focus area for the government •Abysmally low GER of 9. all colleges offering these courses need to be affiliated to a University (in turn under the purview of the central regulatory body called UGC – University Grants Commission). Of late.and time-intensive business. diplomas/ non-graduate courses (16-20 years) and professional courses (18-21 years) such as Engineering (4year tenure at graduate level) and Medical (5-year). innovative structures are getting corporatized to work around the trust regulation Growth Drivers Key risks Key Players Our View
CAGR 12%
•We feel that entities like Manipal Education that have already established scale and a brand have a competitive advantage
Source: IDFC-SSKI Research
HIGHER EDUCATION: HIGHER PRIVATE SPENDS
Higher education = graduation + post graduation courses
A part of the formal education system.000 2012E 31.
46
Central regulatory body – University Grants Commission (UGC)
JANUARY 2009
. AICTE is the regulatory body for Engineering and Management colleges). the not-for-profit mandate. The HE segment consists of graduation (targeting population between 18-21 years) and post graduation (>22 years) courses. private HEIs have mushroomed with the trend veering towards professional courses with high payback potential (engineering. With a headstart in the capital. Further. offered after completion of K12 stint. we estimate the paying propensity of Indians within the HE space to be at ~$20bn. Given the high participation of politicians in the field (vested interests).NKC estimates the need for 1.5bn-2bn ‘capitation’ spends). medical and MBA colleges). regulatory obeisance to multiple bodies.SSKI INDIA
HIGHER EDUCATION: TIME TO ‘DEGREE SHOP’?
India’s private HEIs have grown to be a $6.97 •Government indications of opening up medical colleges to ‘for profit’ entities •Regulatory overhang UGC (University Grants Commission) mandates all HEIs to run in the form of a non-profit trust •An overregulated space •Large political involvement •Very capital intensive •Time to build brand equity (minimum of 6 yrs ) •Manipal Education (Manipal University. the Indian Higher Education market – at $8bn – is next only to the K12 segment in size. The graduation market can further be classified based on the nature of education into graduate courses (18-20 years). we do not see any structural change in the near term. While indirectly controlled by the Ministry of Human Resource Development. While most universities are administered by the state government. However.

private HEIs have sprouted led by a growing middle class and provision for deemed university status
Given the dearth of quality institutes. the proliferation of private institutions has largely been in the area of professional courses like Engineering and Medical as also post graduation courses like MBA.
Private HEIs dominate
India has the lowest spend per student on higher education globally
Over the years.97. private HEIs have boomed since 2004 and the number is growing.IDFC . Other factors that have contributed to the phenomenon include the increasing pay propensity of Indians and prospects of higher returns (payback in the form of fat salary packages) offered by these career-focused products. it has abysmally low GER of 9. With liberalization opening up newer and better job avenues.
Exhibit 56: Public spends on higher education per student – a comparison with other economies
(US $) 11790 12000 9629 8502 9000 Public Expenditure on Higher education per student
Share of Private and Public Institutions Private Public 100
75
50
6000 4830 3986 2728 3000 406 0 Malaysia USA UK Japan Brazil China India
25
0
MCA
MBA
Pharmacy
Engineering
Hotel managemnet
Architecture
Teacher Education
Medicine
Source: Edge report
Post 2004. But the strategy has resulted in India having one of the lowest public spends per student on higher education. public spend on higher education has been gradually reducing – and rightly so as the focus of governments globally is (and should be) on primary education. Today.064).SSKI INDIA
While India may have one of world’s highest enrollments for HE (11m) as also networks of HEIs (currently estimated at 18. more than 40% of India’s HEIs are privately owned and funded (77% are privately owned).
Exhibit 57: Dominance of private HEIs
Share of Private and Public Institutions Private 100 Public
75
50
25
Hotel managemnet
Source: IDFC-SSKI Research JANUARY 2009
Phisiotherapy
Architecture
Pharmacy
Engineering
Teacher Education
Medicine
MCA
MBA
0
Phisiotherapy
47
.

very few universities and colleges were set up by the government sector
1994
• NAAC established by IGC to access and accredit HEIs
• Government almost withdrew from taking additional responsibility for higher education
1993
• NCTE vested with statutory status by an Act of Parliament
• Growing middle class and rise in entrepreneurship accelerated pace of growth of private HEIs
1985
• IGNOU established by an Act of Parliament
• Universities largely confined to arts.SSKI INDIA Exhibit 58: Key milestones of the higher education system
• After 2000. launched
• During this period.
India goes degree shopping!
80% of the spend ($6. has led to a $6. and hence a ‘good future’. most of the colleges have seats which are ‘sold’ at as high as 5x the regular fee. The increasing ability as also intent to pay in return for securing a ‘good career’. spurt in deemed-to-be universities after a provision to be a de-novo institution
2006
• Indian Institute of Science Education and Indian Institute of Research established at Kolkata and Pune respectively
• Most of the new universities being set up by private players
2004
• Education Cess levied for raising additional funds.5bn) is on engineering courses
The HE space is bestowed with high potential volumes.5bn-2bn of additional spend in the space. First two IIMs set up at Ahmedabad and Kolkata
• The government not only supported higher education by setting up universities and colleges but also took over responsibility of running private institutions • Public Funding accompanied with considerable regulation of private institutions
1956
• UGC established by an Act of Parliament
1951
• First IIT established at Kharagpur. even though India has more than 1.5bn private spend – primarily on career-focused courses (more than 80% of the estimated spends on engineering courses). Despite the speed and extent of privatization in the segment. science and commerce streams
1961
• IIT Act passed by the Parliament to provide a common legal framework for all IITs. a satellite dedicated to education.200 of these are private).IDFC . EDUSAT.600 engineering colleges (1. there still exists a yawning demand-and-QUALITY supply gap which is apparent in the high cash transactions (donations/ capitation fees) within quality institutes. Interestingly. High capitation fee – currently deemed illegal – and black marketing of ‘NRI Quota’ seats are estimated to account for $1. This gives rise to the need for more conventional as also alternative modes (such as distance learning) of disseminating higher education. more is necessarily not enough.
JANUARY 2009
48
. Maharashtra
1948: University Education Commission constituted
Source: Edge Report
Quality gap exists – demand for HEIs
However.

SSKI INDIA Exhibit 59: Higher education market Private colleges (no. regulations are more stringent here vis-à-vis the K12 segment. In contrast to the K12 segment wherein a school has to be affiliated to a board recognized by the formal education system.40 0.000 56. it is possible to set up an HEI outside the purview of UGC regulations (applicable only in case of niche world class institutions that find acceptance with industry and academic circles.
49
JANUARY 2009
. of students per college
1.g.00 13.000 90. of engineering students (private)
1. The process of securing registration/ affiliation with a regulatory body is long-drawn and a single HEI is simultaneously governed by various bodies. RULES AND MORE RULES
While ‘recognized’ HEIs need to be affiliated to the system
HEIs are a part of the formal education system and in order to seek recognition from the central regulatory body (UGC) are required to be run under a not-for-profit trust/ society (Rules are more stringent than at the K12 level). Teacher Salary.)
Engineering colleges MBA Medical Total Including ‘Cash Market’ Spends on HE outside India Total spending potential Source: AICTE.200 300 400
Total no. Examinations)
Without the approval of AICTE and UGC.00 21. India is one of the largest exporters of education globally.IDFC .000 300. a large number of Indian students opt for further education outside the country and spend a whopping $13bn every year on securing quality education.000
Market size ($ bn)
5.
HIGHER EDUCATION: RULES.50
$6.00 1.200 300 140
Average no.68 0. IDFC-SSKI Research 8. While UGC (University Grants Commission) is the central governing body.35 6.5bn of spend within India+$1. At 30% of the total inbound US HE traffic. AICTE (All India Council for Technical Education) for management and engineering colleges and MCI (Medical Council of India) for medical colleges. and like other segments in the space. but cannot be superimposed on the entire segment).5bn of cash transactions+$13bn spent outside India = $21bn spend!
Also. The above bodies declare the HEI illegal But HEI can sustain on industry acceptance and hence student acceptance Eg: ISB
Source: IDFC-SSKI Research
Part of formal education – HEIs required to be run under a trust
The higher education segment is a part of the formal education system.440.000
Average spend per student pa (Rs)
150. is required to be run under a not-for-profit trust/ society. This further underpins the paying propensity of Indians. there are individual regulatory bodies for specific professional courses.000 250. Fees. However.
Exhibit 60: Options to set up an HEI
Setting up an HEI
With the approval of AICTE and UGC and adhere to their strict norms. e. (Syllabus.

Though there have been talks of liberalizing private HE entities (especially Medical Colleges). AICTE has black-listed 110 universities for not seeking recognition from the body. "these fake institutions have no legal entity to call themselves as University/ Vishwvidyalaya and to award ‘degrees’ which are not treated as valid for academic/ employment purposes" University Grants Commission Act 1956. Further. Thus.
HEI governed by various bodies. liberalization. As of date. private institutes run by linguistic and religious minorities will have complete freedom to administer the institute
Exhibit 61: Ambiguity in judgments for private institutions in higher education Year
1992 1993 2002
Cases
Mohini Jain vs State of Karnataka Unni Krishnan vs State of AP TMA Pai vs State of Karnataka
2003 2005
Islamic Academy vs Union of India Chhattisgarh University versus Union of India
Contrary to the judgment a year ago. Further.SSKI INDIA
Accreditation for universities in India is required by law unless it has been created through an Act of Parliament. as no UGC recognition was present and >100 universities had sprung up in the state with dubious quality and poor infrastructure
Source: Websites
While much needed structural changes not in sight. If the government does decide to throw open the formal education sector to for-profit private players.
50
JANUARY 2009
. a committee to be set up for admission and fees regulation Declared unconstitutional a provision in the Chhattisgarh Private Sector Universities Act (2002) permitting establishment of private universities.
No regulations – an option
World-class quality HEIs can shirk the system if they find industry acceptance
Unlike in the K12 segment wherein a school HAS to be affiliated to one board or th th the other for its pass-outs (grades 10 and 12 ) to be recognized as part of the formal education system and eligible for further studies. Capitation fee is illegal Private colleges can charge fees higher than govt colleges but will be regulated by the state. ISB (Indian School of Business. Definition of capitation fee changed but capitation fee still declared illegal Apart from some regulations set by the state on reservation of socially backward classes. it is possible to set up an HEI outside the purview of UGC regulations. But importantly. Without accreditation. The diploma offered by ISB holds as much (arguably more) value as any UGC-accredited certification. As long as industry quarters perceive the products to be of superior quality. if and when it occurs. archaic rules and known to be corrupt
These bodies not only have very stringent and archaic rules.
Brief description
Fees in private colleges need to be charged in parity with govt colleges. Hyderabad) is a venerated name in the industry corridors despite it not being affiliated to any regulatory board. they are considered highly corrupt by most industry factions. the high involvement of politicians (~70% of HEIs in Maharashtra are run by politicians) given the segment’s high profit generation potential (though indirect) make the much-needed realignment and a structural shift look too difficult to achieve. we expect the liberalization process to start with HE. would start with HE
Regulatory conditions are unlikely to change in a hurry as education is a highly politically and socially sensitive sector.IDFC . it cannot be superimposed on the entire segment. The products of these institutes (students passing out) do not have to conform to acceptance standards of the education system but of the industry. For example. this status requires maintenance of world-class quality and strong industry support. there is no single bill pending in the Parliament with the intent. else termed as capitation fee. the HEI can do without these cumbersome affiliations. regulations within the space are not clear – as can be seen in the ambiguity in judgments for private HEIs in the past.

100 courses through 129 programmes. Manipal Universal Learning (the corporate entity) offers various services to students of Manipal University and Sikkim Manipal University in lieu of payments from its two universities (refer pg no 113 for details). The company has been in the higher education space for the last five decades and has acquired scale (18.
MUL (the corporate entity) offers services to students of SMU (a trust) in lieu of payments from SMU
Distance Education – an alternate mode
India’s low GER renders a greater need for a higher number of conventional institutions as also an alternative mode of HEIs such as ODL (Open and Distance Learning) institutes.IDFC . a miniscule ~7% go in for Distance Education. The body is also the regulator in the space. Distance Education can be considered an effective and low-cost alternative to on-campus HEIs. FDI in education. has till date extended approval to more than 130 institutions to offer distance education. Setting up an HEI is an investment-heavy proposition (~Rs5bn for a medical college). The DEC (Distance Education Council).000 students enrolled for 1. set up under a clause within IGNOU (Indira Gandhi National Open University).SSKI INDIA
HIGH HOPES FROM INNOVATIVE STRUCTURES
Two-tier structures – company supplies services to trust
Issues related to trust formation. Currently. perception of low quality has led to Distance Learning being treated inferior to on-campus education.000 students in its campus education programmes at Manipal University and 100. Supplementing the brick-and-mortar educational institutes. has been allowed under the automatic route without any sectoral cap since 2000. which has led to certain quarters raising demand for an autonomous body to govern the space (a bill is pending approval pertaining to the same).000 468. including higher education.621 study centers. despite being affiliated and hence recognized by the relevant regulatory bodies. IGNOU is India’s largest distance education provider with ~500. yet there is ambiguity around the space and degrees awarded by foreign universities are not recognized by the UGC or AICTE.
Alternative forms like open and distance learning institutes can fill the gap
This further underscores the need for alternative forms of learning. the ODL model does not impose any limits on the number of students in terms of infrastructure.000 students in distance education programmes at Sikkim Manipal University). Though this portends a huge opportunity. 64 regional subcenters and 1. Also. One way to improve GERs is to allow foreign universities to set up shop in India. regulatory ambiguity and vested political interest are the key barriers to capital commitment from for-profit organizations. For example.444
IGNOU is the largest distance education provider in India
Study centers
550 1621
Low brand perception mars potential to scale
There is large untapped potential in the segment as out of the ~10% population enrolled in HEIs in India. there are some players that. However.
Exhibit 62: Distance Learning Semester enrollments
SMU IGNOU – India’s largest distance education provider Source: IGNOU 140.
JANUARY 2009
51
. have managed to extract legitimate profits from these universities through innovative structures.

000 students enrolled for its various programmes. The largest player within the space is Manipal Universal Learning (revenues at $180m). Scalability and value creation can be achieved only by those players that have managed to establish creativity (to circumvent the regulatory requirements).SSKI INDIA
While Distance Education has low entry barriers for suppliers. most of the top education companies by market cap belong to the US (where ‘for-profit’ education is permitted) and also to the HE space where they have managed to create strong brand equity over the years.
An annuity model but a long-term game. However. 10 years)
Manipal Universal Learning is the only ‘large’ player within HE space
While Indian HE space is dominated by private institutions.7bn) or Devrys (revenues at $933m) in the country. we observe that most of them have outperformed the benchmark index performance consistently and significantly. Sikkim Manipal University (SMU. Due to the lower capex requirements for setting up MBA colleges. content (reputed courses with pricing & annuity power) and credibility (of the management to build a long-term value proposition). we expect maximum private participation in this part of the opportunity. we do not see any Apollos (revenues at $2. higher education is a long-term game and players in the space will have to invest considerable assets and time to gain credibility. largest value creating education companies are in HE space
Globally. given that quality of a course can be controlled by improving the input and thus the output.IDFC . The capital-intensive nature (a medical college entails an investment of ~Rs5bn) and long gestation (minimum six years required to build a worthwhile brand) make this a long-term game. This is largely due to HE being a part of the formal education and mandated to be run as not-for-profit trusts and over-regulated by bodies like AICTE. Having earned a name in the field. the industry too has low regard for this medium.
Exhibit 63: Players in HE space outperform the index Current Mkt Cap ($ m)
Apollo Group Devry ITT Educational Services Strayer Education Career Education Corinthan Colleges Capella Education Raffles Education Megastudy Educomp Solutions Ltd 13017 3824 3714 2969 1767 1292 965 826 759 683
Key business
Higher Education Higher Education Higher Education Higher Education Higher Education Higher Education Higher Education Higher Education Online Learning Multimedia in schools
Period
Jan98-Dec08 Jan98-Dec08 Jan98-Dec08 Jan98-Dec08 Jan98-Dec08 Oct99-Dec08 Nov 06-Dec08 Jan 02-Dec08 Jan04-Dec08 Jan 06-Dec08
Returns over the benchmark index
460% 34% 404% 506% 323% 312% 164% 3385% 634% 758%
Source: Bloomberg (Period is max (period of existence. capital (built to last). we feel that an apt model and superior pedagogic measures can establish a strong brand. Extrapolating the returns that these companies have generated over a period of time. a distance learning institute) has managed to achieve significant scale with ~100. By doing all the right things. requires considerable capital and time investments
Value creation only for players with 4Cs
JANUARY 2009
52
. it then becomes an annuity model.
IQ: HIGH (BUT LONG-GESTATION PERIOD)
Globally. Overall.

etc India’s first university in India to be built on PPP Model.IDFC . Engineering.
JANUARY 2009
53
. IDFC-SSKI Research
While distance education (as against setting up brick-and-mortar institutes) is an alternative and less capital-intensive model to build scale. Ahmedabad.
Players like MUL.000+ students from 53 nationalities Model On-campus . we believe players like Manipal Universal – that have an already-established scale and brand in the HE space – are at an advantage vis-à-vis new players moving up the value chain (like IMS and Career Launcher – two strong brands in the coaching class market). Law.500 post grads. Pune and Hyderabad. Allied Health.000 students in 32 different courses
Engineering. 17 institutions. 100.New Delhi (3). Distance Education provided through satellite. Chennai. 18. Allied Health Sciences. Diploma. with established scale and brand. 5. branches in Mumbai. etc Engineering. Company.100 students (4. Management. USA and Dubai)
Management and Corporate Trainings
13 Under-grad and post-grad courses
6. Dental. Bachelors and Masters courses in InfoTech. 550+ Learning Centres.SSKI INDIA Exhibit 64: Key players in the HE segment
HEIs Status 12 professional streams.Medicine. College of Post Graduation
7 campuses
Engineering. Biotechnology. Management (ISBM). time taken to build a brand and the low brand perception emerge as the key concerns. Hotel Management. Management
Source: Websites. Management. etc
Located in the north-eastern state of Sikkim. Law.000+ students 38 colleges
HQ. UK. will have competitive advantage
While it is not yet time for degree shops in India. Pharmacy. 600 undergrads) 25 campuses (across India. Bangalore. Total 9 colleges. Biotechnology. Information Sciences.

IDFC - SSKI INDIA

VOCATIONAL TRAINING: NEW VISTAS
The imperative for students/ employees to draw on skill sets to effectively compete in a dynamic business environment has given birth to vocational training – a parallel $1.5bn education system. Also, the increasing relevance of services sector in the Indian economy calls for enhanced technical/ soft skill sets. Corporates (across industries) too are gleaning from their global counterparts the culture of continuous upgradation in skill sets of employees at all levels. While the factors suggest rapid growth (25% 3-year CAGR) as new training areas (retail, aviation, hospitality, management, English language/ soft skills trainings, etc) emerge, the space remains highly fragmented. Also, nonsticky nature of corporate trainings implies low revenue visibility, thereby hampering scale. At this stage, only a few players like NIIT and Aptech (leaders in IT trainings) have managed to accumulate mass. Others players with the potential to ‘scale’ include VETA (English training) and ICA (financials trainings).
Exhibit 65: Vocational training market – a snapshot
Segment Revenues ($ m) FY08E 1,500 Revenues ($ m) FY12E 3,660 Growth drivers •New opport unities apart from IT - retail, BFSI, English and Life skills trainings •Employers demand productivity from day one •India’s demographic dividend - surplus of 47m working age population (India) while shortage of 56m for ROW by 2020E CAGR 25% Key risks Key players Our view

Vocational Training •Caters to age group of >14 years; ($500m for domestic IT training; $1bn for vocational trainings such as retail, aviation, English and FMT)

•Slowdown in IT and other services sectors •Corporate training revenues have low margins; revenues lumpy in nature

Vocational training has been broadly defined as training that prepares individuals for specific vocations or jobs. Vocational training has assumed growing importance in India’s growth story. The economy’s 8%+ growth for three consecutive years can largely be attributed to increasing contribution from its services sector (up to ~55% in the last decade or so). Further, vocational training has moved beyond IT/ ITES into verticals like financials, retail, media, aviation, hospitality, etc. In any services business, human capital is the key asset and upgradation of workers’ skills at all levels becomes an imperative to sustain growth. In developed economies, a month per year is reserved for training/ re-training/ re-education of employees right up to the age of 55-60 years. Also, corporates are laying ever-increasing emphasis on productivity from day one, which is prompting employees to work on enhancing their skill sets.

New areas of trainings emerge

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54

IDFC - SSKI INDIA

India a largely untrained nation
Only 5% of Indians (19-24 years) are trained

Nearly 95% of the youth in the 15-25 years age group formally learn a trade or acquire a skill/ competency in most of the developed world. In contrast, only 5% of India’s young labour force (19-24 years) is estimated to have acquired formal training. Low enrollments and high dropout rates throughout the education chain result in an inefficient supply of workforce. With a net 37% enrollment at school level, ~230m Indians are not equipped to work in the organized sector. Further, 87% of the people drop out after the school level. This leads to only 10% of college-aged population actually attending HEIs; further, 80% of the graduates in general streams (i.e. non-career specific courses) like BSc/ BA are unemployable. Due to the high dropout rates and inefficiencies rampant in the system, a large chunk of the population needs to be trained.

Low enrollments and a high dropout rate – dire need for trainings

Exhibit 66: Workforce crunch in India Inc
India Inc is experiencing a workforce crunch Risk Managers Financial Analysts Wealth Managers Doctorate Scientists
Apart from a quantity shortage the primary concern in India today is a quality crunch. According to industry estimates only a quarter of all graduates are employable and ~80% of the job seekers in employment exchange are without any professional skills Companies are able to select only eight or nine people out of 100 who apply and that’s a pretty low selection ratio…In my estimate only a third of the pool has the right skilld to be absorbed into the industry right away – Kiran Karnik, President, NASSCOM The issue is no longer about finding jobs for people, but of ensuring that there are enough people with relevant skills for the jobs at hand – KV Kamath MD ICICI

There is huge gap in the specialiszed skilled front and we are constantly faced with the question as to how we get highky qualified people – Kiran Mazumdar Shaw, MD Biocon

Source: FICCI, NASSCOM, IDFC-SSKI Research

Government’s network of ~5,500 ITIs is not enough

The government, to provide vocational training at various levels, has set up a network of ITIs (Industrial Training Institutes) falling under the purview of the labour ministry. The ~5,500 government-run ITIs impart vocational training covering 110 trades including carpentry, electricians, masonry, etc and offer a collective capacity of 749,000 seats. Also, there are 500 polytechnic colleges offering diplomas in technical courses. However, quality and capacity constraints as also growing relevance of new-age trades mean that this network is not sufficient to meet the demand.

The space encompasses training services at all levels, be it for students passing out from schools and colleges or re-training needs of the employed set. We estimate the $1.5bn market to grow rapidly (~25% CAGR) in the coming years. The following exhibit points to the high underlying demand for vocational training across sectors like IT, financial services, retail, aviation, hospitality and English language training.

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55

IDFC - SSKI INDIA Exhibit 67: Key vocational training segments – IT, BFSI, Retail, Aviation, English, etc
• Indian IT-ITES is a $50bn market. Indian IT-ITES training market is estimated at $525m; with Indian IT-ITES expected to cross $70bn in revenues by 2010, IT manpower requirement should witness 27% CAGR Non-IT graduates employed in IT sector growing faster than the number of IT graduates, fuelling demand for private institutes offering IT education in languages, networking and multimedia The US corporate training market estimated at a whopping $60bn; 57% of the market is outsourced, implying a $3bn-4bn potential. The animation industry needs over 30,000 people while supply is a mere 10% of the requirement
IT Manpower Requiremnet(000) - CAGR 27%

IT - ITES training market $m
Indian IT training Market Indian Corporate Training (10% of the IT Training market) Hardware & Networking Training (30% of the IT Training Market) Source: company estimates 160.0 50.0 525.00

•

• • • • •

IT workforce requirement

The financial and management training space, estimated to be a $300m space, expected to show 30% CAGR Other areas like retail offer an opportunity with 2m employees required within organized retail industry by 2010E) Aviation and English language training market estimated at ~$1bn

4000

3000

2000

1000

0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY10

Source: IDFC-SSKI Research

Corporate training market potential has not been completely realized

While the importance of Corporate trainings has not been completely realized in the Indian market, it forms 10% of the Indian IT training market and is expected to grow. Infosys (one of the largest recruiters in India) has set up a Rs2.6bn Global Education Center in Mysore (Karnataka) in 2005 with a further Rs6bn planned to be spent on the facility for expansion. Also, the company spends Rs200,000 on every graduate selected for the global training programme. While this presents a large opportunity for private players in the space of training before and after employment, it does not convert/ translate into opportunity if not outsourced. Currently, the corporate training market (predominantly in IT) stands at ~$50m. A new order setting in – formal education meets vocational: The ever-changing dynamics of education and employability in a knowledge-driven economy are throwing up interesting trends. Employers are increasingly seeking employees that can contribute to the company’s topline/ bottomline from day-one and skill sets have to be continuously updated to remain competitive. In this backdrop, the lines between formal and non-formal education have started to blur. To ensure quality training, employer companies are joining hands with private players to impart customized training to future employees. An interesting example of the same is the arrangement between ICICI and Manipal University to form ICICIManipal Academy (IMA) – a 1-year campus programme that is employer (ICICI) sponsored and guarantees employment to students after completion of the course. Manipal University charges a mutually agreed fee to ICICI for the same.

Employers want productivity from day one

IMA – ICICI Manipal Academy – an interesting trend

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56

000 sq. Deputy Chairman. mainly through PPPs
PPP – a beginning has been made: Another opportunity.000 vocational schools run in PPP
JANUARY 2009
57
. Curriculum designed by Manipal and ICICI together and course delivered by IMA Structure of collaboration • Manipal invests in exclusive campus.000 vocational schools will be opened in India in next five years in PPPs. The Centre has approved PPP. Planning Commission. Educomp has taken over running of 18 ITIs as well as 12 skill development centers erstwhile run by the state government in Gujarat.
Center has approved a scheme to upgrade 1. IDFC-SSKI Research
NIIT too has formed ventures like IFBI (Institute of Finance. Banking and Insurance) in collaboration with ICICI and various other corporations. Of this.IDFC .
Rs310bn allocated for National Skill Development Programme. Guest faculty includes people from ICICI Bank and senior industry professionals
Source: Company.396 ITIs. According to the statement of Mr. N. wherein the corporate sector will play a major role. Full-time faculty having minimum five years of relevant industry experience. faculty and facilities. K. admissions based on a written entrance test and interview • Students deemed employees of ICICI on admission into IMA. is on the horizon for private players in the space. it charges a mutually agreed fees per student to ICICI • 5-year lock in for both parties • Applicants require to be graduates from any discipline. Singh. Scheme to upgrade 1. Bangalore facility is a campus (also leased) of 11 acres near Jakur. with 150. Rs411bn has been earmarked for setting up ICT labs for computer aided learning and Edusat Centers for distance learning programmes while Rs310bn has been allocated to National Skill Development Programme for training through Virtual Centers for Vocationalization. More such arrangements are expected to follow. The 11 Plan has allocated Rs721bn to be spent on ICT and Vocational training. ft of built-up area • A teacher student ratio of 1:15/20 is targeted. 250.396 ITIs and transform them into Centres of Excellence. join ICICI as Assistant Manager (Band 1 grade) after completion of course Programme design • 1-year residential programme – nine months of classroom training and three months of internship • ICICI provides students with a monthly stipend during classroom training and internship • PG Diploma in Banking awarded at end of programme with an opportunity to carry credits and continue for MBA in Banking through distance education mode • Facilities in Hyderabad and Bangalore Infrastructure • Hyderabad facility is a leased building. though small in size. to open 250. The focus of the Indian government is to dispense education with stress on th employment. or Public Private Partnership.SSKI INDIA Exhibit 68: IMA (ICICI-Manipal Academy)
• ICICI takes charge of admissions.

5bn market. has emerged into a $1. India would have a surplus of 47m people in the working age group by 2020 while RoW would see a shortage of 56m in this age group.IDFC . However. ICA in the accounting training space as also Frankfinn in aviation and hospitality trainings are other leading players in their respective categories. a shortage of quality trained personnel to dispense this education and lack of process-driven models have kept scalability at bay.2bn) has grown by using a mix of owned and franchisee outlets with smaller players like Liqvid tapping the opportunity through the product licensing route.
Exhibit 69: India to fund a global workforce shortage
Note: Potential surplus is calculated keeping the ratio of working population (age group 15-59) to total population constant Source: US Census Bureau. In this backdrop. BCG analysis
IQ: LOW (STILL TO SCALE)
Shortage of skilled teachers. VETA (revenues of Rs1. While corporate spends on training are discretionary and based on competitive pricing. a lumpy stream of revenues within this space is another deterrent to scalability. there is a substantial need for vocational trainings. India could capitalize on potential global workforce shortage
Based on current and estimated population demographics.SSKI INDIA
With quality skills-related training. In the English Language training space.
NIIT and Aptech the only players with scale
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58
. subject to the country upgrading the quality of its education and skill set development. With the high degree of dropouts and non skilled workforce. The market has remained largely fragmented barring a few like NIIT and Aptech (leading players in IT training space). increasing mobility of the Indian workforce and its unique demographic dividend (a young working age population) can work in India’s favour. We expect 25% CAGR in the market over 2008-12. a non-formal and non-regulated segment of IES. the market has not evolved to its full potential yet as the importance of training over the lifecycle of an employee has not been fully realized in India. people-centric models and lumpy revenues in corporate training cap scalability
Vocational training. Further.

$216m
•A person-centric business. 80% of the market lies in ‘subject-based tutoring in schools and colleges’ – and thus is highly dependent on local ‘brand-teachers’. So much so that a $6.4bn coaching class market is growing at ~15% yoy led by a dearth of quality institutions in India and cut-throat competition for entry into professional colleges. This is evident in the fact that the number of seats in Indian IIMs (Indian Institutes of Management) has increased merely 3% (2003-2008) but the number of CAT aspirants has shown a CAGR of 19% in the same period.400 Revenues ($ m) FY12E 11. Bansal Classes. While the Grad and Post-Grad test prep market ($1. Notably.$51bn Graduation TestPrep$1bn Post Graduation Test Prep . next only to K12 and HE) – coaching classes – has sprouted around formal IES. Mahesh Tutorials is the only player to have achieved a relatively higher scale (revenues of ~Rs700m) on the back of some process-driven effort.
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. TIME and Career Launcher have achieved scale within the segment and are extending their presence across segments to expand the addressable market. The market is rapidly growing as the Indian education system lays heavy emphasis on marks scored in an exam.
Exhibit 71: Coaching class market – a snapshot
Segment Revenues ($ m) FY08E 6. people-centric models make scalability onerous in the space and cap value creation. A shortage of quality HEIs is further fuelling growth.SSKI INDIA
COACHING CLASSES: IS THE ‘COACH’ SCALABLE?
The $6. IMS.200 Growth drivers •Poor quality of teaching in existing education system •Shortage of qualit y formal education institutes increasing competition for admissions at grad and post grad level Key risks Key players Our view
Coaching Classes •~64% of non-formal market •Caters to three distinct s ub seg ments Tuitions .2bn) offers limited scalability as it is more content-driven. FIITJEE.IDFC . It is less of a challenge in smaller sub-segments where coaching is dependent more on content rather than individual ‘brand teac her’
CAGR 15%
Source: IDFC-SSKI Research
THE QUALITY CONUNDRUM: GENESIS OF COACHING CLASS MARKET
Poor quality institutions and a score-centric exam system fuelling growth of coaching classes market
India’s already inadequate education system is being further stretched due to its increasing population.4bn segment (64% of the total nonformal IES. scale difficult to achieve unless business becomes processdriven
•Agarwal classes •Sinhal Classes •Chate Classes •JK Shah •Sukh Sagar •Brilliance •Karla Shukla •Mahesh Tutorial •FIITJEE •Bans al Classes •Career Launcher •TIME •Career Forum •IMS
Is the ‘coach’ scalable? •Scalability is a c hallenge in 80% of the market (tuitions). Despite its non-regulated nature.

Exhibit 73: Subject-based tuitions – the largest in coaching class market Total students (m)
School subject tutoring (6th-12th) Tertiary education Total subject based tuition market Source: Interaction with industry sources.7%
Source: IDFC-SSKI Research
15% CAGR over FY08-12E
We have segmented the market into three broad categories – subject/ concept-based tuitions catering to K12 and HE segments (estimated at $5.8 0.1bn).1bn) and Post Graduation test prep market (~$220m).088
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61
.e.Based on application of concept 16. This.9%
6th-12th and tertiary education (tutions market) Subject/Concept based 79. While we expect some pockets to grow faster. A highly fragmented market. players are also looking to provide coaching through online media – a model quite popular in the global markets.35 10. The coaching class market is typically fragmented and regional in nature as a big th th chunk. our interactions with industry players throw up instances of students moving enmasse to another coaching class. the tuitions market forms 80% of the coaching class opportunity and is inherently difficult to scale.4%
Grad test prep . translates into lack of stability and scalability for coaching classes. tuitions (6 -12 grades and tertiary level).000 10. pockets like grad and post grad test prep are more process-driven as content assumes higher relevance than teachers. Interestingly. the business is personcentric and individual teachers attached to schools/ colleges are much in demand. especially developed ones. is subject-based and thus highly people-driven with high dependence on a local ‘brand-teacher’. 12 and university exams at tertiary level).SSKI INDIA Exhibit 72: Coaching class market
Coaching Class Market Post grad test prep Aptitude based 3. i. However. and content can be standardized across centers. crowd-pulling ability in this segment rests with brandteachers (especially attached to schools/ colleges) and not brand-institutes.
A highly fragmented market as it is peoplecentric and not processdriven
Tuitions market– low scalability
Tuitions market (subject based) characterized by lack of stability and scalability
At $5. IDFC-SSKI Research 90 11
% taking coachingStudents enrolled (m) Average fee pa (Rs)
22 5 19.55 20.IDFC . to follow the brand-teacher who has joined a particular institute.000
Market ($ m)
4. However. Graduation test preparation market ($1. Thus.950 138 5. th th For exams held on a national level (10 .1bn. in turn. the model would take time to evolve in India given the negligible broadband connectivity (< 1%). we estimate 15% CAGR for the segment over FY08-12.

a few players have managed to gather relative scale. Further. a renowned name in Maharashtra.
Grad Test Prep market – medium scalability
Engineering test prep commands a majority share
At $1bn.IDFC .
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62
.SSKI INDIA
Mahesh Tutorials – most scaled in a non-scalable business
By reducing their overdependence on individual teachers (more than one teacher teaching one subject) and adopting a more process-driven approach. admissions to these th courses could be based on the score/ marks secured in 12 grade exams or aspirants could have to take AIEEE and CET entrance tests depending on the preference of the incumbent state government. which means that players can scale up to an extent. In the past. it holds only 3% share of the state’s total tuitions market. IDFC-SSKI Research
Engineering 59%
Grad test prep market based on application of concepts. IIT-JEE market players do not face this risk as entrance exams are always conducted on a national level. This presents a key risk to coaching class players th operating within the segment as when admissions are based on the merit list of 12 grade. offers some scalability
Most segments in the market have entrance tests that are conducted on a national level. the eligibility criteria for a few HE professional courses have been seen to change with new political parties assuming office.
Exhibit 74: Grad Test Prep Market
Grad Test Prep Market
Any change in testing standard – a key risk
Civil Service (IAS) 12%
CA 6%
Medical exams 23%
Source: Coaching class companies. For example. AIEEE and CET market together form 60% of the segment). On the other hand. MT Educare (brand name – Mahesh Tutorial). has managed to reach revenues of ~Rs700m. coaching for AIEEE and CET is rendered redundant. However. followed by the next most-coveted profession of medical services (~23%). we believe the company would find it difficult to scale-up further in this particular business as despite being one of the ‘largest’ players. The test prep market for entry into a graduation course is dominated by the engineering segment (IIT-JEE. dependence on ‘brand-teacher’ is relatively lower. the Grad Test Prep market accounts for 17% of the coaching class opportunity. the tests are based on application of concepts and with test preparation worksheets and materials forming the study curriculum. thus.

500 200. and higher focus on standardized content and study material (a key differentiator).
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63
.000 20. the market is dominated by CAT aspirants (market at $90m).500 12. Kota’s entire economy rests on the coaching class market – be it owners of food stalls.000 250. Apart from being held at a national level.000 108.000 180.000) and translates into a market of Rs5bn!.) For example.‘Kota mein coaching classes nahin hoti to kuchh nahin hota’ (‘but for coaching classes.000 7.000 5.000 1. the entrance tests of these courses are more aptitude-based.000 300.IDFC . which have a very high hit ratio of 21% – i.25 2. grocery shops and autorickshaws.SSKI INDIA Exhibit 75: Graduation test prep market – IIT-JEE market dominates Total students
IIT.078
Kota Economics – a Rs5bn market around coaching classes!
Indians attach high aspirational value to IITs (Indian Institute of technology). IDFC-SSKI Research 400.000 25.000 12.586. or the growing hotel industry.000 12. With 50.500 45.000 600.
Post Grad Test prep market– scalable but small
Post grad test prep market (aptitude-based) is relatively more scalable
At $200m.600 428 150 54 632 1. Kota would have been any other non-descript Indian town’) – that’s the response of the local population in Kota. a unique phenomenon has emerged in a town called Kota in Rajasthan.209 students from Bansal Classes have made it into IITs. (Players offering Classes for IIT-JEE preparation like Bansal and Resonance accept only those students for coaching who have cleared their own entrance exams.000 20.000 120. this category of coaching classes has relatively lower dependence on ‘individuals’.000 students from all over India going to Kota for IIT preparation. the average spend including accommodation comes to Rs100.500 400.000 2.000 1.e.JEE AIEEE CET Engineering CLAT BBA/BMS Medical exams Civil Service (IAS) SAT* CA Total grad test prep market Source: Coaching class companies.000 30. Interestingly. Nipuna Academy at Talwandi offers a 45day crash course to prepare students for Bansal Classes.000 25. With ~300. 1.000 30. the Post Grad Test prep market is relatively easier to scale but forms only ~3% of the coaching class opportunity. there are classes to coach students to crack entrance tests for these coaching institutes.000 applicants every year. Thus. While implying tough competition for securing admission into these institutes.000 4. residents who rent out rooms and publishing companies that print study material.538 out of the total 7. the meccahs of graduate engineering courses.000 500.000 171.000 per student (average fee of Rs56.120.000 25.19 250 128 2 63 1.000
% being coached
95 50 90 50 50 80 95 50 80
Students enrolled Average fee (Rs) Market size ($ m)
380.

the $6.
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66
. In the coming few years. we see limited value creation potential in the space as scalability is a challenge in 80% of the market (tuitions). Yet. Engg CET. penetration is expected to double as the national Broadband and Wireless Policy targets to bring 25m subscribers to the broadband fold by 2012. players find it relatively easier to attain scalability. HSC 10th. In the remaining 20% of the market offering coaching for aptitude-based entrance exams to engineering/ professional courses. With ~3m broadband connections (less than 1% penetration). Law Engg.12 (Science and Commerce) AIEEE. India is way behind the global average.4bn coaching class market is one of the largest opportunities within the IES (following K12 and HE) and is expected to witness 15% CAGR till 2012. Medical. Medical IIT-JEE Kota Mumbai Mumbai Mumbai 6 10 3 Maharashtra Mumbai 89 24 6500 3500 2000 10000 8000
th
Region
Mumbai
Current Network
10
No of Students
1000
Online tutoring market – in its infancy
Online tutoring in India not yet scaled up due to very low internet broadband penetration
The phenomenon of online tutoring is very new in India. Medical CET Commerce and CA Commerce and CA Science Science Engg.IDFC . Players like Tutor Vista that have a pure online model in the US are looking to follow a hybrid model in India to tap the potential in this segment.SSKI INDIA Exhibit 80: School (tuitions) and grad test prep – a fragmented market Focus Area
Sinhal classes Chate Classes JK Shah Sukh Sagar Brilliance classes Karla Shukla Brilliant Tutorials Vidyasagar Bansal Classes Source: IDFC-SSKI Research ICSE.
Exhibit 81: Broadband penetration Year Ending
2005 2007 2010 Source: Trai
Internet subscribers
6m 18m 40m
Broadband subscribers
3m 9m 20m
IQ: LOW
Limited value creation in coaching class segment due to lack of scalability
A non-regulated space.

Segment depends on content and material
Unique feature
Content specified by schools & colleges. and Lightspeed Venture Partners and Sequioa Capital ($30m in Tutor Vista in three rounds). the space has seen some PE activity including by Helix Investments ($12m for a 30% stake in Mahesh Tutorials). We believe scalability can be improved by companies that manage to create strong process-driven model by reducing dependency on brandteachers.IDFC . the Post Graduation test prep segment has seen emergence of a few national chains – namely IMS (revenues of Rs1bn).3m in Career Launcher). Style of teaching the only differentiating factor. Career Launcher (Rs900m). Players like Mahesh Tutorial in the tuitions market (Rs700m) and FIITJEE (Rs1. or by formulating strategies to retain brand-teachers (strong incentives such as ESOPs or revenue share). Key risk – students could follow a ‘brand teacher’ enmasse to another institute High
Dependence on brand teacher Scalability Size ($ m)
Medium
Low
Low 5.088
Low-Medium 1. Segment less dependent on ‘brand teacher’
Test prep for entry into post graduation courses
Caters to aspirants preparing for admissions into a quality postgraduate course Aptitude testing – largely honed through self practice and taking different types of tests.078
Medium-High 216
Source: IDFC-SSKI Research
While the coaching class market remains largely regional and highly fragmented. Gaja Capital ($8.SSKI INDIA Exhibit 82: Coaching class market
Tuitions
Description Caters to school & college level subject tutoring
Test prep for entry into graduation courses
Caters to aspirants preparing for admissions into a quality under-graduate course Content not defined. Career Forum (Rs900m) and TIME (Rs1bn).
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.2bn) in the IIT Grad Test prep market have managed to establish scale to some extent.
While the space has seen some PE activity. Questions based on application of concepts. lack of process-driven models will prevent scalability
Interestingly.

Oxford. Macmillan. LOW GROWTH
The Indian books market. can be divided into two segments – text books ($1.
Exhibit 83: Books market – a snapshot
Segment Revenues ($ m) FY08E 1750 Revenues ($ m) FY12E 2500 Growth drivers •A spurt in the number of private schools offering 'quality' books •A change in syllabus pushes sales of text books and supplementary books in that particular year Key risks Key players Our view
Books •With >8.000 publishers . In this backdrop. only ICSE and a few CBSE schools use text books published by private players such as Tata McGraw Hill.75bn. private publishers have access to just 60% ($1bn) of the market given the monopoly of state boards and NCERT (National Council of Education Research and Training) in 95% of the school text book market.2bn) and supplementary books ($510m). Navneet Publications is a leader in the supplementary books market.
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. The remaining 5% of schools are under the CBSE and ICSE boards – while CBSE uses books published by NCERT (National Council of Education Research and Training .70% of the target market reuses books •95% of school text books market not up for free play (the state and NCERT print the books)
Text book publishers •Tata Mcgraw Hill •Cengage (formerly Thompson) •John Wiley •SChand •BPPLaxmi Publications •Oxford •Macmillan •Orient •Longman Suplementary Books – Navneet Publications
Less free play. Around 95% of schools in a state are typically under the state board and follow books printed by the SCERT (State Council for Education Research & Training). a large part of the school text books market ($740m) is out of reach of private publishers given the monopoly of state boards and NCERT. However.75bn in size. we assign low IQ to the segment. the market is characterized by low growth due to low sell-through (100% students do not buy books and refer to class notes. With a truncated school text book market and growth of just ~9%. Market available for private players is $1bn •We expect low growth due to the high reusability of books
CAGR 9%
Source: IDFC-SSKI Research
Indian books market – less free play
State boards and NCERT have monopoly in school text books market – 40% of the total books market
We estimate the Indian books (text and supplementary) market to be at $1. private players have access to a truncated Rs1bn books market. etc) and presence of a large secondhand books market (70% of the target market reuses books). However.SSKI INDIA
BOOKS: LESS FREE PLAY. low growth •95% of the school text book market is not available to a private publisher as the state or NCERT prints the curric ulum. Further.IDFC . etc. estimated to be $1. private text books market is highly fragmented
•Large second hand books market . Within a highly fragmented market.providing academic and technical support to the Ministry of Education).

IDFC-SSKI Research
10 to 15 16 to 17 18 to 21 21 onwards working professionals 1.
Book worms grow slow
Scalability a challenge due to a large base of vernacular schools
The books market has failed to grow at healthy rates despite increasing enrolments and decreasing dropout rates in schools. with revenues of Rs4bn (FY08). scalability in the school text books market poses a challenge to national players as a large chunk of the schools are vernacular.
Exhibit 85: Need for books in regional languages across India
(% of students) 100 70 75 50 50 30 25 15 20 50 Regional 85 English
80
0 Preprimary Primary/Secondary (Std 1 to Std X) Higher Secondary (Std XI to Std XII) Post Higher Secondary
Source: Companies. Further. is the leader in this market.IDFC . of publishers
1000+ 400+
Text books prepared by
Private publishers SCERT (state boards). International publishers (International schools). This is primarily due to the low sell-through (100% students do not buy books and refer to class notes. and at $510m is one of the largest markets. ICSE. IDFC-SSKI Research
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69
.750 1047
450 90 200 100 200 1240 537
200 90 100 na
150+ 100+ 100+ na
(some CBSE schools) Private players Private players Private players
510 510
Private players enjoy free play in the higher education books space
The higher education space offers more free play (except the distance education curriculum provided by IGNOU) to private players and is estimated to be $300m in size.SSKI INDIA Exhibit 84: Indian Book Market Age (years)
Pre primary Primary 3 to 5 6 to 9 200
Text books (US $m)
Supplementary books ($ m)
30 90
No. Navneet Publications. etc) as also presence of a large second-hand books market (70% of the target market reuses books). private publishers
Secondary Higher Secondary Graduation Post Graduation Professional Books Total Market ($ m) Total accessible market $m (only 5% of the school books market is currently accessible due to market distortions) Source: Company. and thus text books used in these schools are in various regional languages. The supplementary books market is a complete free play for a private player. NCERT (CBSE Board).

Provides typesetting and ITES services.000 4. which caps the size as also growth of the highly fragmented books market.
Exhibit 86: Key players in the Indian books segment
History
Formed a JV with McGraw Hill in 1970 Incorporated in 1959
Status
Private Public
Revenues (Rs m)
2. reference books. The inherently low growth rates associated with the space imply that the segment has the lowest IQ within IES.IDFC . Manages education portals Books and CD ROMS
Incorporated in 1970
Public
2. 25% from professional books and 5% from school text books 65% of revenues from publishing (supplementary and reference books) and 35% from stationary (paper and non-paper) Publishes school and college text books.111
Business model
70% from HE text books.SSKI INDIA
IQ: LOW
Various SCERTs (State Council of Educational Research and Training) and the NCERT (National Council of Educational Research and Training) have a monopoly in school text books.097
Incorporated in 1930
Private
NA
Source: Websites
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.

SSKI INDIA
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.IDFC .

an annuity business model) Key presence. While evolving as a full-service education provider. Key presence with ‘Smart Class’. Educomp is also operational in other ancillary segments of IES (preschools. At 16x FY10E earnings and 8.2m teachers till date. High growth market ~70%CAGR till 2012 (Underpenetrated at <5%). coaching class and vocational training). The company has Content in Smart Class – a differentiated product with annuity attached (5-year lock-in). we see value creation potential in the stock.929 subscribers). 484 preschools) Key presence going ahead. At USD 20bn. the company addresses ~60% of the IES value chain and does not have a footprint only in the books and HE segment. Creativity to generate profit from the not-for-profit K12 market ($20bn – largest within IES) by using an innovative corporate structure and Capital to fund future growth (balance sheet size of Rs7bn.Trained 1. Educomp is on a strong growth trajectory (64% CAGR in revenues as also earnings over FY08-11E). the company has recently forayed into the formal education business (11 K12 schools currently operational).Set up seven brick and motar learning centers in NCR. Educomp is the market leader(8915 schools coevered till date). underwritten debt funding at Rs7.000) students.5x EV/EBITDA. Credibility with proven scale on the back of successful execution. High growth market ~90%CAGR till 2012.IDFC .
EDUCOMP: MOVING BEYOND LICENSING
Present across 60% of the $50bn IES
Educomp has expanded its addressable market from $160m (IT in private and public schools space) to ~$30bn. A dominant player in ‘multimedia for private schools’ and leader in ‘ICT for public schools’ businesses. To provide longevity to its business model. Educomp is the market leader (1267 schools till date. With this. Joint venture with Raffles Education in India -
Preschool
K-12
Present across 60% of US 50bn IES
HE
Multimedia in private schools
ICT in govt schools
Coaching Classes
Vocational Training Books
Source: IDFC-SSKI Research
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74
. the largest space across IES.
Exhibit 1: Presence across the value chain (~60% of the $50bn opportunity)
Current Size Growth Non Regulated Scalability Value Creation Educomp Solutions Comment Roots to wings (60 preschools).3bn inorder to fund the growth over next two years).SSKI INDIA
INVESTMENT ARGUMENT
We like Educomp’s business model as it possesses all the key success factors required to create scale and value in IES – the 4Cs. Professional development (Teacher Training). Currently 11 schools (14. L1bidding and long receivable cycles lower value creation capability Mathguru (A company online initiative with 28. Acquired 50% stake in Euro Kids (second largest preschool chain. Acquired 50% stake in Takshila Management Services (low cost schools).

Currently.8bn). increasing focus on direct initiatives
Educomp derives 86% of its revenues (Rs2. The product does not involve any capex or opex cost for the school and students are charged on a monthly basis (Rs150 per student). Contracts are typically for a duration of five years. Smart Class has been implemented in 1.5bn
Multimedia in private schools uses digital educational content and infrastructure solutions in schools as a teaching aid. which makes Smart Class an annuity product. i.267 private schools till date. less than 5% of the 44.267 private schools (current order book at Rs9. 44% of revenues). primarily on the back of its multimedia product offering called ‘Smart Class’ (44% of revenues in FY08) and ICT solutions (33%). the market offers potential in excess of $1. fun and interactive). we expect the multimedia for schools market to register 60% CAGR as penetration levels rise.000 private unaided schools in India have embraced multimedia.5bn! Multimedia products are typically targeted at unaided private schools. The remaining 14% of the revenues accrue from direct initiatives like sale of educational aids.
EBIT margins
(%) 70 58 53
Exhibit 2: Revenue mix (FY08)
Others (Retail & Consulting) 14%
61
Proffessional Development 9%
Smart Class 44%
35
29 24
18
ICT 33%
Source: IDFC-SSKI Research
0 Smart Class ICT Proffessional Development Others (Retail & Consulting)
‘SMART CLASS’ IS EDUCOMP’S TRUMP CARD!
Educomp has seen a 127%CAGR over FY06-08 pivoted around ‘Smart Class’ and ICT
Educomp has seen 127% CAGR in revenues over FY06-08.e. where paying propensity of parents is comparatively higher (at an average fee of Rs150 per student per month – less than the cost of a pizza. it constitutes a miniscule price of the total monthly fees while making the teaching-learning process clear.
75
A well packaged product – no capex/ opex for the school.86bn in FY08) from B2B initiatives including Smart Class (a multimedia product. ICT Solutions (33%) and professional development.
Multimedia in private schools (Smart Class) – key value generator
With expected CAGR of 60% over FY08-12. The product has been very well received and has created a $70m market (~$31m is with Smart Class. strong annuity with 3-5 year lock in
JANUARY 2009
. While ICT is an undifferentiated product offering (providing computer hardware and IT training in public schools using the L1 bidding process).IDFC . CDROMs and learning content pertaining to various online initiatives (Mathguru and Learning Hour) as also offline ventures – preschools and K12 schools.SSKI INDIA
86% of revenues from B2B initiatives. Educomp has pioneered a well-packaged multimedia product called Smart Class and implemented it in 1. teachers’ training (9%). Going forward. ‘Smart Class’ will continue to be the key value generator for Educomp in the years to come. As of date. remaining with competitors). which indicates that the market potential is in excess of $1.

Going forward. IDFC-SSKI Research
High margin (58% at EBIT level) & high RoCE (49%) expected to expand
Smart Class a high RoCE business The upfront capital cost (~Rs85.000 49%
JANUARY 2009
76
.
Exhibit 4: Smart Class – smart economics
Revenue per student pm No of students per class Revenue per class EBITDA Margin Investment per class RoCE Source: Company. Educomp has managed to build a strong content library comprising 16.000
0 FY08 FY09E FY10E FY11E
Source: Company. Towards this end. Educomp plans to substitute the plasma/ LCD screens used in classrooms with digital whiteboards and projectors.SSKI INDIA
Educomp has a strong first mover advantage with >40% market share
Educomp has shown 251% CAGR over FY05-08 in Smart Class revenues.000
2. the investment is recovered in just over a year. this would lead to RoCE expansion. IDFC-SSKI Research Rs150 40 Rs72.000 modules and an extensive distribution network with a 185-people sales team. we expect Smart Class to remain the key value creator (78% CAGR over FY08-11E) for Educomp.000 3. With >40% of the market. it has a strong first mover advantage in the space and the product scores high on Content (a differentiated and annuity product).IDFC . players in this space are working on lowering their capex requirements.963
Underpenetrated market (<5%) and first mover advantage will lead to an 78% CAGR over FY08-11E
3.000 1. Over the years.
Exhibit 3: Strong growth in Smart Class
EOP Smart Class schools (nos) 4. As players expect to cut capex by ~20%. Given the under-penetration and strong first mover advantage.697
2.000 Rs41.700 933 1. To further reduce its capex requirement.760 58% Rs85.000 per class) is borne by Educomp. Educomp plans to lease the hardware for new contracts as against owning the assets. Assuming an average of 40 students per class (Rs150 per student per month. payments usually on quarterly basis). The product fetches high margins (58% at EBIT level) and superior RoCE (49%).

A new facility is coming up at Parwanoo (Himachal Pradesh) and is expected to commence operations in FY09. Operate.
The knowledge center server is connected to the existing classrooms through a campus wide structured Ethernet network. content replication/ duplication by competitors or the schools remains a risk. The blackboard can slide over the plasma TV enabling the teacher to switch between the black board and the plasma TV. A full time Resource coordinator is deployed by Educomp at the knowledge center to train and support teachers to work with the program.IDFC . high returns have been attracting players to the space. However. Each Smart_Class room has a plasma TV. The cd content is encrypted and has a hardware lock. which needs to be attached with the school server for access to the modules
Source: Company. Also. The hardware unlock code is with the resource coordinator.
Educomp acquiring ‘competitors’ to fortify its leadership
Even though Educomp provides for a hardware and software-lock in order to protect the IP.
The classrooms are converted to Smart_Class rooms. which means increasing clutter. we expect the growth momentum to continue for at least 3-4 years. Thus.
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. Greater Noida (NCR) and Bangalore. it has also been acquiring ‘competitors’. IDFC-SSKI Research
Educomp has set up three content development facilities based in Gurgaon (NCR). Own and Transfer) with a contract life of five years.SSKI INDIA
Smart Class Model The product is offered on the BOOT model (Build. we see Educomp well placed to protect its leadership as besides having a head-start in the business with a strong brand.
The required content is sent to the school written on a CD which is then uploaded on the server in the knowledge center and can be used by the teachers as per requirement. after which the hardware belongs to the school.
Smart Class mechanism
Smart_Class Mechanism
An existing room/space inside the school campus is converted into Smart_Class Knowledge Center.

915 schools till date). in public schools. Educomp (50) Everonn (555). The government tenders contracts for public schools within a district to private players and the contract is typically distributed among 2-3 players. but margins are low as contracts are awarded on L1 basis. Assuming that the value of a contract (typically 5-year duration) is Rs1m.000 is required. which can be improved by extending the scope of contracts from just hardware to providing software/ additional services in some states (higher revenues) or by bagging pure service contracts. Educomp (500)
High growth potential. IDFC-SSKI Research Rs1m 5 years Rs200.e.IDFC . Everonn (1.000 20% Rs300. the government has allocated dedicated funds for ICT. an upfront investment of Rs300.055
Companies
Educomp (2. Also. Educomp (leader in the space with 8. Funds amounting to $125m have been earmarked towards the ICT initiative for FY09 and ~29. but L1 bidding and a long receivables cycle cap returns
While the business offers high growth potential to established players like Educomp (with penetration at less than 11% of public schools. i.
Exhibit 5: ICT contracts in a state – shared by 2-3 players States
Gujarat Karnataka West Bengal Source: Companies.SSKI INDIA
ICT (Instructional & Computing Technology) – gains with pains
A PPP initiative – Educomp is a market leader
With the objective of improving computer literacy. A lab in a public school requires an investment amounting to ~30% of the value of the contract. the business entails high upfront investments (~Rs300.000 13%
Low RoCEs of ~13% can be improved with a mix of pure services contracts
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. Thus. an ICT contract has 13% RoCE. IDFC-SSKI Research
No. Everonn.000 Rs40.817).
Exhibit 6: Economics – a hardware and services contract
Value of contract Period of contract Average revenue per lab pa EBIT EBIT margin Investment per lab (30% of Value of contract) RoCE Source: Interaction with industry sources. NIIT. A hardware and services contract over the period would generate EBIT margins of ~20%.075 1. the L1 nature of projects (L1+T1 of late) and a long receivables cycle (150-200 days) reduce its attractiveness. Aptech (250). on a normative basis. of schools
4.000 per lab per school).000 schools already covered).000 schools are expected to come up for bidding within the year (~100. setting up of computer labs and providing training in computer literacy.256) NIIT (700). we expect the market to grow 10x by 2015).000 1. Compucom and Aptech are the dominant players with a host of regional players also operational in the space.

we expect ~10% CAGR for Educomp in this business over the next three years.860
16.e.040 0 FY 08
Source: Company. additional training and software). we expect the company to capture a substantial share of the market going forward. IDFC-SSKI Research
Educomp – market leader in ICT
We expect incumbents to sustain the lead – Educomp expected to see 57% CAGR over FY08-11
Educomp is the market leader in the ICT space and has serviced 8. Educomp will be able to easily meet all the pre-qualification criteria required by various states going ahead.188 25. which is higher than for peers (average EBIT margins at ~20%) – as according to the management.914
10.915 schools till H1FY09 (~10% market share). Going forward.
The state government gives out RFPs ( Requests for Proposals) with a prequalification clause. Educomp runs its own training programme under the brand QUEST (Quality Education for Students & Teachers) and trains teachers in partnerships with various foundations (Learning Links Foundation and Learning Leadership Foundation). IDFC-SSKI Research
ICT market – leading players Players
Educomp NIIT Everonn Compucom Source: company
No. the initiative is expected to grow
Professional development involves teacher-training initiatives. Educomp also services the schools with ‘computer aided learning’ (i.IDFC . Based on its prior experience.550 6.652 3. We see 57% CAGR for Educomp in its ICT business over FY08-11E.SSKI INDIA Exhibit 7: ICT Mechanism
The bidding evaluation process is a two-stage process (T1&L1) technical bids followed by financial bids for the short-listed firms.13m teachers till date.
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.200 20.160 15.
Negotiations take place with the L1 bidders (usually 2-3 companies)
Source: Company. besides providing ‘computer education’ (i.080 5.
Professional development
Having trained over 1m teachers.004 4.570 teachers during FY08 and has trained a cumulative 1.164 2.120 10. of schools (till FY08)
6. Professional development accounts for 9% of Educomp’s revenues but fetches high EBIT margin of 61%. With 29.000 schools coming up for bidding in FY09.
Exhibit 8: Growth in ICT@ public schools this is for Educomp
EOP ICT Schools 25. Educomp trained 305.e.004
FY09E
FY10E
FY11E
Educomp currently earns an EBIT margin of 29%. hardware).

based on various agreements between the schools and Edu Manage
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.000 students. Educomp has established a 3-tier structure in order to ‘legally’ bypass the regulation stipulating that the ‘reasonable surplus’ be ploughed back into the same school. which means that the profit generated is locked within the same school and no dividends can be distributed out of the same. canteen.4% stake) . transportation.SSKI INDIA
ENTRY IN K12: AN ‘ASSET LIGHT’ TO ‘ASSET HEAVY’ MODEL
Having established presence in the smaller but high-growth areas of IES.5% on capital employed in setting up schools ii) 4. etc) to schools Edu Manage gets residual earnings of the school.
Exhibit 9:K12 . delivery.
Creative kid – innovative structuring
Educomp has forayed into K12 – the largest market within IES
All K12 schools have to be set up as a trust/ non-profit body under the jurisdiction of the education boards and/or state boards.5% of annual tuition fee and iii) one-time fee of Rs5m per school Educomp School Management (Educomp has invested Rs50m for s 68% stake) provides IP/ content and management services (content. While we do not expect the venture to materially contribute to revenues over the next 2-3 years (7% of revenues by FY11E). Educomp has been working aggressively on expanding its addressable market so as to garner scale. text books. IDFC-SSKI Research
For each owned school. Educomp has till date has access to 11 schools with 14.4% in Edu Infra
Educomp owns 68% in Edu Manage
Edu Infra
Edu Manage
Tier 2
A three-level structure in order to extract the surplus generated by the trust
Lease rentals
Management fees
Trust (Non profit body generating a ‘reasonable surplus’) Tier 1 Tution fees Teacher’s Salary
Source: Company. The company has recently forayed into K12 – the largest segment of IES. it would help Educomp secure its backended growth funnel as also annuity for the longer term. Educomp Solutions forms a trust that runs the school’s operations Educomp has two formed two subsidiaries Educomp Infrastructure (Educomp Solutions invested Rs500m for a 69.IDFC .owns the real estate and leases it out to the schools Edu Infra gets: i) Returns of 14.Innovative structure
Educomp
Tier 3
Educomp owns 69.

While this implies huge potential for the business. Pune. high land costs (hoarding and reselling of the demarked land at higher costs and unavailability of such plots) can make the proposition economically unviable. according to various industry estimates.
Exhibit 10: 11 K12 already operational
PSBB Millennium PSBB Learning Leadership Academy PSBB Learning Leadership Academy Millennium school Millennium school Chiranjeev Bharati School Chiranjeev Bharati School Residential school DPS Source: Company. every state demarks land to be used only for building schools and these plots of land are to be given at a substantial discount to market price. However.000 additional schools are required to meet the existing demand. Bangalore Lakshmipura Village. The company has recently merged the two subsidiaries to form Educomp Infrastructure & School Management Services Ltd – EISMSL. of which ~60% would be owned.
Rapid scale-up planned – we estimate 50 schools by FY12
Educomp expects another 22 schools to be operational by the next academic year and plans to reach a base of 150 schools by FY12. IDFC-SSKI Research
Enough demand for schools…but high land costs can make the economics unattractive
There is enough demand for quality private schools in India (according to NCERT. Bangalore Noida Mohali Palam Vihar.4% and 68% stake respectively. based on the pace of expansion so far. we have estimated addition of 1112 new schools every year and 50 schools to be operational over the same period. Gurgoan Sushant Lok. Educomp invested Rs500m and Rs50m in each of the subsidiaries for a 69.IDFC .000 additional private schools even at higher price points). Further. Within the same year. of schools 50 50 40 30 20 10 0 FY08 FY09E FY10E FY11E FY12E 7 15 26 37
Source: Company. Gurgaon Mussoorie Patna.2m respectively. which will now provide both infrastructure and content/ IP /services to the Millennium Schools (own schools) and only IP (Millennium Schools Learning System) to other schools. IDFC-SSKI Research Chennai Hulimavu. scope for 20.
81
JANUARY 2009
.8m and Rs0. Ludhiana (Management services)
Exhibit 11: Growth in K12
EOP no.SSKI INDIA
Educomp Infrastructure Pvt Ltd (EduInfra) and Educomp School Management Ltd (EduManage) were incorporated by Educomp’s promoters in FY07 with a seed capital of Rs1. 200.

A step-up in acquisition or management contracts may provide an upside to our numbers. Ahmednagar (Maharashtra) and Gaya (Bihar) by coming academic year (June 2009). ~60% of schools are expected to be owned
While ~60% are expected to be owned schools (greenfield or acquisitions of existing operational schools). Further. Takshila owns six parcels of land and plans to set up three schools in Hoshiarpur (Punjab). DLF will not invest any capex Collaboration with Ansal Properties & Infrastructure along with associate company.
Exhibit 12: Strategic tie-ups Developers
DLF Ansal
Model
Educomp will purchase land which will be at a discount to market price. the move is positive in the longer term. ft (assuming a significant discount to market price.000 (Industry average at ~Rs2000). the venture generates EBIT at ~90% of the net revenues (~35% of gross revenues).
…a positive over the longer term. IDFC-SSKI Research
Going forward. which would provide land and infrastructure on a 60-year
lease basis on 15-17 identified sites for the schools segment Source: Company. Educomp has offered its Millennium Schools Learning system (which includes comprehensive school management services) under management services contracts to schools like PSBB (Padma Seshadri Bala Bhavan) and DPS(Delhi Public School). Economics per school CBSE regulations mandate a minimum land area of two acres for setting up a K12 school (one acre for metros) with a minimum requirement of 25 sq.5bn in a subsidiary Knowledge Tree Infrastructure). we expect the K12 business to contribute 7% to Educomp’s revenues by FY11. Educomp has indicated that it has a potential land bank of ~70 properties in the form of various strategic alliances. KTIL (Ansal will invest Rs2. the remaining are expected to be pure management service contracts. For our calculations. Educomp has recently acquired a 50% stake in Takshila Management Services Pvt Ltd (a company looking to establish high quality schools in Tier II and Tier III cities) at relatively lower price points (average fee Rs18. we expect each school to do net revenue of ~Rs30m at full capacity. (EBITDA margin at ~40%). While creating a strong annuity proposition within the largest space of IES. Under our assumption of 50 schools by F11. state development authorities reserve plots of land to be used only for schools) and constructed area of 30 sq.000 and a one-time admission fee of Rs25. but we do not see significant value in the near term
Minimum requirement by boards – 2 acres of land and 25 sq. ft of constructed area per student
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. we have assumed the entire project to be debt funded. Net of operating costs.IDFC . For the calculations below.000 per annum). we have estimated a gross revenue of ~Rs76m per school (running at full occupancy).SSKI INDIA
Educomp has tie-ups with real estate developers that lead to low land cost
We see Educomp in a relatively stronger position given that the company plans to form strategic tie-ups with leading developers like DLF and Ansal Properties & Infrastructure for setting up schools within the townships. ft per student. Adjusting for operating cost at the company level. though we do not expect this business to add any significant value in the near term.000-student capacity school (run as a trust) with annual fee of Rs35. we have assumed a capital expenditure of Rs163m per school towards a 2-acre plot @ Rs750 per sq. ft per student.
Educomp looking to acquire footprint across price points in K12
K12 – a back-ended growth funnel though limited value in near term
K12 business expected to generate EBIT of 35% of gross revenues (Rs76m at full capacity per school)…
Assuming a 2.

Educomp has also acquired a 50% stake in EuroKids – India’s second largest chain of preschools with 484 centers (reported revenues of Rs200m and PBT of Rs10m in FY07). plans to set up career centers in colleges to impart vocational training to students with various courses targeted at enhancing their employability. operating under the brand ‘Purple Leap’.SSKI INDIA
OTHER BUSINESSES: IN SCALE-UP MODE
Educomp operates in various other segments of IES including preschools.5m in May 2008. vocational training and tutoring – primarily through acquisitions and strategic alliances. Educomp also plans to proactively set up more brick-and-mortar coaching centres across India (eight centres operational in NCR). Singh. the portal has 28. which builds online communities around e-learning.com.396 ITIs and transform them into Centers of Excellence.IDFC . an initiative of AuthorGen. The company has 60 preschools operational under the brand ‘Roots to Wings’ which is being expanded using the franchisee model. Educomp has also acquired a 51% stake in AuthorGen Technologies for Rs27m. Educomp has made a good start here and the opportunity could translate into big gains. Authorstream. though in the longer term. a premier provider of Web-delivered curriculum and assessment with more than 2m students in its portfolio. which it is planning to expand aggressively.5m over the next two years to acquire a 76% stake in the company. Educomp has acquired a 51% stake in US-based Learning. Educomp.
Preschools – acquired 50% stake in second largest player
Educomp has acquired a 50% stake in EuroKids – a preschool chain with 484 centers
Educomp has nascent operations in the preschool segment. The Centre is opting for the PPP route to upgrade 1.com for $24. where the corporate sector will play a major role. According to the statement of Mr N. is a web platform for connecting students and teachers.
Online initiatives
Building up a presence in the online coaching class market
Educomp has set up various online initiatives (such as Mathguru – a mathematicshelp online programme catering to grade 6-12 students). Acquired for a consideration of Rs390m. Educomp also has a 70% stake in Savvica for $2m. Based on an annual subscription fee. the move will help Educomp consolidate its position as one of the market leaders in the preschool space (market size –$300m.000 vocational schools will be opened in India in next five years under PPP (PPP).
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84
. Planning Commission. an elearning company in Canada. The agreement has a provision for Educomp to increase its stake to 74% over a period of time.929 paying subscribers and is expected to see robust growth going forward. K. Educomp is further building up presence in the coaching class market with online tutoring portals called ThreeBrix and Learning Hour.
Vocational training – a start with acquisition and PPPs
Plans to set up career centers offering trainings with focus on employability
Educomp has acquired a strategic stake in A-plus Education Solutions Pvt Ltd and plans to invest Rs107. 250. Deputy Chairman. Educomp has also established PPPs with 18 ITIs (public vocational training institutes) as also 12 skill development centers run by the Gujarat state government. 36% CAGR over FY08-11E).

China – a 3. The JV would be in force at two levels – one for providing professional education development programmes in India and the other for K12 initiatives in China. The 50:50 partnership programmes will be rolled out over the next 2-3 years. India. China. Raffles caters to the higher education space. for $3.SSKI INDIA
JV with Raffles – India and China
Raffles – one of the leading players within the HE space
Educomp has formed two strategic joint ventures with Raffles Education. The group also owns the Oriental University in Langfang.
2 JVs for vocational training in India and K12 initiatives in China
Acquisition in Singapore. Malaysia. executive management and hospitality.000 students. Vietnam. The JV in India will offer the already well-established (localized to cater to Indian needs) professional development programmes in design.000 digital curriculum content modules as well as its team of 400 developers and three development centers within the Chinese market. In China. the Philippines. With strong presence in Singapore. Singapore. we expect a 64% CAGR in earnings over the period as Educomp’s K12 business (capital-intensive) is in ramp-up mode. China.9m. Thailand. like India. Thailand. We expect 64% revenue CAGR for Educomp over FY08-11 with significant margin expansion (~1200bp) over the same period driven by the increasing proportion of revenues from Smart Class (highest EBIT margins of 58%). With revenues of $80m. material contribution is still some time away in these ventures. Overall. ft campus with 19 colleges and 57. Raffles and Educomp will together invest $100m-150m over the over the next 2-3 years.IDFC . The company established its first college in Singapore in 1990 and the group today operates three universities and 20 colleges across nine countries in the Asia-Pacific Region – Singapore. a cross-selling opportunity
Educomp has recently acquired ASKNLearn. Mongolia.
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. China.
FINANCIAL ANALYSIS
We expect Smart Class to be the key growth driver for Educomp over the next 3-4 years. has one of the largest K12 markets globally (~1m schools). the JV will leverage Raffles’ existing pool of intellectual property of over 16. Australia and New Zealand.31m sq. Brunei. a Singapore-based educational services company. The existing Raffles Design Institute in Mumbai will be merged into the JV operations. Though Educomp has consistently been investing in future growth engines and expanding them aggressively. Japan. Vietnam and Kuwait. ASKNlearn provides content and services to ~140 schools and offers Educomp an opportunity to cross-sell its content.

111
1.662 0 FY09E FY10E FY11E 2. Educomp needs to commit capex of ~Rs3. Educomp has issued non-convertible debentures of Rs1bn with another Rs6.400
2.123
2.IDFC .
Exhibit 18: Capex requirements
Smart Class (Rs m) 7.161 2.250
Source: IDFC-SSKI Research
While we have assumed ~15% of Multimedia and ICT contracts as ‘outright buys’ with schools/ government paying upfront for the hardware.382 1.SSKI INDIA Exhibit 17: PAT growth
PAT (Rs m) 3.623 312 1.159 1.25bn underwritten by Axis Bank (Rs2.750 1.200
64% CAGR
3.
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. Educomp is adequately funded
Educomp is aggressively expanding its business across segments.600 706 800
0 FY08
Source: IDFC-SSKI Research
FY09E
FY10E
FY11E
Funded for growth
With the recently issued NCD and underwritten debt. Apart from the ~Rs140m per school investment for its two investment-heavy businesses of multimedia (Smart Class) and ICT in schools (we have assumed ~15% of the contracts as outright buys).4bn for the K12 business (as per our estimates of 37 schools by FY11E). the capex requirements could be lower as Educomp switches to the lease model for the hardware component of these contracts (currently owned assets model).110 1.000 256 1.500 169 560 1.330 3. we see the company adequately funded for the targeted growth.5bn drawn till date). While the requirement is hefty.540 ICT k12 Others
5.583 2. We have estimated a total capex requirement of ~Rs15bn for Educomp over FY09-11.

preschools and online to vocational education). investments across the value chain. We initiate coverage on the stock with an Outperformer rating and a target price of Rs2. tying up with renowned players like PSBB. With the company investing in creating future growth engines that would strengthen its annuity model. we believe it exhibits all the traits of a winner.800 (PEG of 0.IDFC .267 schools with 3-5 year lock-in. we see the from an asset light to an asset heavy model as the intent to create a strong backended growth model. order book of Rs9. Considering high visibility for ~80% of the revneues. Educomp has created scale on the back of a sticky business model with an annuity attached.35x FY10E) proividng a 45% upside from the current levels.first mover to implement a product (Smart Class) in 1. Educomp has been one of the few players to have acquired scale and create value. As it morphs from being an education ancillary into a full service education provider by moving beyond licensing (Multimedia) to direct intervention (schools. evolving as a full education service provider
Within a largely non-scalable space. access to Rs7. DPS and Raffles
Creativity
Subsidiary (erstwhile EduInfra & EduManage) provides land & services to own schools run by a trust
Capital
Balance sheet size of Rs7bn (FY08).5x EV/EBITDA).SSKI INDIA
VALUATIONS AND VIEW: HIGH IQ – BUY
A sticky business model with annuity attached.8bn
Source: IDFC-SSKI Research
At 16x FY10E earnings. proven track record in execution and ability to fund future growth.
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.3bn of debt to fund growth over FY09 and FY10
Content
Creating an annuity . high visibility in revenues and 4Cs lead to a high IQ – we see 45% upside from current levels
We expect 64% CAGR in Educomp’s revenues as also earnings over FY08-11. the stock offers high value creation potential at current valuations (16x FY10E earnings and 8.
Exhibit 19: Investability Quotient
Creativity Educomp Solutions
Source: IDFC-SSKI Research
Content
Capital
Credibility
IQ
Exhibit 20: Educomp’s 4Cs
Credibility
Scaled operations.

SSKI INDIA
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.IDFC .

500
7. the management’s ability to create a stream of strong annuity cash flows remains to be seen. IDFC-SSKI Research
…but the business offers low RoCE
The ICT business offers scalability. 48% CAGR over FY08-12E). We currently see low ‘Investability Quotient’ for Everonn and await visibility on new high-growth businesses.964
Exhibit 1: Everonn – a dominant player in ICT space
Players
Educomp NIIT Everonn Compucom
No. most commonly structured as BOOT contracts for a period of 3-6 years. While the revenue mix is increasingly veering towards VITELS (a value product) with focus on extending the product to schools (iSchools with a 4-5 year lock-in). IDFC-SSKI Research
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.442 schools as of Q2FY09).000 13
…but value creation opportunity limited with low RoCE of ~13%
Period of contract Average revenue per lab pa EBIT EBIT margin (%) Investment per lab (30% of value of contract) RoCE (%) Source: Industry.919
0 FY07 FY08 FY09E FY10E FY11E
Source: Company.860
7. but the L1 bidding process in the business caps value creation potential.
Everonn – a dominant player in ICT for schools space…
Everonn well placed to capture the opportunity…
Being one of the frontrunners in the space (4.000 Rs40. Neutral
ICT: VANILLA OFFERING DOMINATES REVENUE MIX
We expect ICT market to grow 10x in size by 2015
ICT (Information & Communication Technology) is a PPP initiative by the government for setting up infrastructure to provide IT training in public schools. Going forward. of schools (FY08)
6.164 5.000 No of ICT schools 8.hardware and services
Value of contract Rs1m 5 years Rs200.
High growth in ICT for Everonn
10.
Exhibit 2: Economics of a typical BOOT contract . we see Everonn Systems well placed to take advantage of the high growth opportunity.000 3.064
41% CAGR
5.IDFC-SSKI INDIA
INVESTMENT ARGUMENT
Everonn is a relevant player in the ICT space (58% of FY08 revenues. Given that only 11% of total public schools have implemented ICT till date. we expect 41% CAGR in the number of ICT contracts for Everonn over FY08-11E.164 2.652 3.164 2.000 20 Rs300. we expect the $90m market to grow 10x in size by 2015.004 4. but it promises limited scope for value creation with RoCE as low as ~13% (for a typical BOOT contract).500 1.

Everonn has a unique product offering in the form of VITELS. We have assumed that going ahead... This product is targeted at colleges..442 schools under the outright buy model. As the infrastructure can be levered to an unlimited number of institutions (Everonn uses each studio across ~50 institutions at a time to avoid clutter in the interactive sessions). the model – if scaled – offers strong operating leverage. which would translate into lower (by ~20%) capex requirements vis-à-vis the owned asset model. Present with the high-growth multimedia to schools (and colleges in this case) space. The company has set up seven studios (plans to add 9 additional studios in FY09) that offer virtual education and training courses to colleges and schools using the VSAT (Very Small Aperture Terminal) technology.
Of late. RoCE has been improving in the business on the back of two key factors: (i) some state governments follow the ‘outright buy’ model. and the receivables cycle is high (~150 days). and (ii) the company plans to increasingly move towards the leased asset model.IDFC-SSKI INDIA
Lower capex requirements and shorter receivable days improve economics. which leads to higher returns. we believe the business offers limited value creation potential as most of the contracts are still awarded on L1 bidding (thus commoditization and no scope for product differentiation).
. Despite this. wherein the government pays upfront (at the beginning of the contract) for the hardware. Everonn currently has 1. 50% of the incremental hardware required will be on lease. These factors make the business less attractive in terms of value creation capability.
Exhibit 3: Product offerings
VITELS
vColleges (362 centers) Offers vocational courses (not compulsory) to college students on VSAT platform
Schools (388 ce nters) Offers curriculum and Non-curriculum courses to schools
vCorporate & vRetail (29 centers) Offers VSAT platform for various corporate and retail partners
vSchool (218 centers) Offers non-curriculum courses (no t compulsory for students) using a pure VSAT model
iSchool (170 centers) Offers curriculum content installed in local server and delivered using an interactive whiteboard and a projector.700 schools out of the 4.yet L1 bidding restricts differentiation and returns
VITELS: A ‘VALUE’ PROPOSITION
VSAT based model offers operating leverage
VITELS (Virtual & Technology Enabled Learning Solutions) can potentially emerge as a key value generator for Everonn. supplemented by VSAT platform (compulsory for students)
Source: Company. schools and for corporate and retail activities. IDFC-SSKI Research
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.

The session is interactive as it allows a two-way audio-visual access.
Exhibit 5: Various courses extended to college students
Skill Enhancers Career Oriented . video and computer systems. these courses need to be marketed to students and are not compulsory in nature.IDFC-SSKI INDIA
What is VITELS?
Everonn System provides educational courses and lectures to colleges and schools through a virtual mechanism. Everonn provides a virtual classroom set-up to schools and colleges where students can view lectures that are transmitted from an Everonn studio via VSAT.NET SPM Data Warehousing
Technical Support
Banking & Finance (PGCBF)
Financial Services
To be Launched
Security Certificate On ERP Expert Certification
Infrastructure Management
Retail Management
NanoTechnology
Source: Company
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. Instructors use the studio set-up to effectively communicate ideas (using presentations and animations) and interact with students across institutions.
Source: Company.000.
Exhibit 4: VITELS Mechanism
The infrastructure consists of studios and virtual classrooms (set up by Everonn in every schools and colleges).IT Career Oriented – NON IT
Effective English Communication Currently Offered
Placement Preparatory Programme
Software Testing (ADSTQM)
Java / J2EE (ADJP)
Bio Informatics (Anna Univ)
MBA Entrance Preparatory
Soft Skills
Business Communication
.000-40. IDFC-SSKI Research
Colleges – operating leverage but little scalability
Optional vocational training through the multimedia product
Under the VITELS portfolio. Priced between Rs1. Everonn’s studios are equipped with the requisite audio. Everonn provides vocational training to college students in the form of career-oriented and skill enhancement courses.

which Everonn looking to stem out by extending the offering to private schools
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. IDFC SSKI research Rs500.000.000 Rs135. Assuming 20% of the students take up a course at an average price of Rs4.000 45%
But model short on scalability
…yet irregularities in revenue stream from colleges limit scalability.
As the number of colleges in the fold increases. This means high degree of irregularity in revenues (in contrast to products like Smart Class that offer a large student base and a strong 5-year annuity in cash flows). costs at studio level (>50 colleges linked to a single studio) as well as at corporate level comes down per college.000 Rs12.IDFC-SSKI INDIA
Economics – operating leverage
Entire capex is borne by Everonn
Everonn sets up a virtual classroom within a college that offers a two-way audio and video model.
Operating leverage leads to healthy margins.000 Rs54.000 330. the company is increasingly focusing on its schools proposition – i-Schools.000 Rs273..000 Rs227.000 80... one studio caters to 50 colleges) and a virtual classroom (Everonn Learning Centre) at a cost of Rs250.000 per college. VITELS generates a healthy EBITDA margin of ~45%. we have assumed 600 students enrolled per college.1m for the year shared among ~50 colleges) Studio and other op costs (Rs600. With 18. per lab) Studio (Rs4m shared by 50 colleges) Total capex per college Source: Company. Currently. Everonn has so far implemented iSchools in 170 schools. The cost of setting up the infrastructure is borne entirely by Everonn.. a majority of the courses offered through VITELS are not compulsory for students. IDFC SSKI research 250. thereby yielding an EBITDA margin expansion. In an effort to build a steadier stream of revenues.000 Rs42. every college is expected to generate ~Rs500. The infrastructure comprises studios entailing capital investment of Rs4m per studio (generally..000 73% Rs84.000 for the year shared among ~50 colleges) Total expenditure EBITDA EBITDA margin Source: Company.e.
Exhibit 6: Economics on a per college basis (Rs)
Capex per college (i. contracts are for a duration of 4-5 years – which imparts higher revenue visibility.000 per annum. which exposes Everonn to the risk of inconsistent revenues..000
Exhibit 7: Economics per college
Revenue per college College level costs Operating margin at college level Field level per college costs Studio per college cost Bandwidth cost (Rs2. However.
. Under this model.000 HEIs and 11m students enrolled.
With operating leverage kicking in (shared studio and bandwidth costs). the product is not compulsory in colleges and needs to be marketed to students as well.

the product is expected to generate EBITDA margins in excess of 70%. Like in colleges. lack of annuity and lumpiness in numbers is a key risk going ahead. iSchools business offers an EBIDTA margin of 56% and RoCE of 47% to Everonn. We expect increased focus on the iSchool model (contracts having a lock-in period of 4-5 years. Each class within a school requires an investment of Rs135.000 students in grades 6 to 12 .IDFC-SSKI INDIA
vSchool going to iSchool
Multimedia to schools space – high growth. The teacher in the classroom can utilize the contents as and when required. Every iSchool is also equipped with a webcam. thus ensuring annuity cash flows) and expect it to form ~55% of VITELs revenues by FY11. every school is expected to generate revenues of ~Rs1. What is iSchool? With the recent acquisition of the content division of Aban Informatics (‘Class on the Web’).and improving its score on Content parameter
Economics of iSchool – low operating costs and healthy EBITDA margins
Increased focus on iSchools
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. a few classrooms (as per the choice of the schools) within the school are equipped with an interactive whiteboard. and is VSATenabled to facilitate live and interactive special sessions. Everonn has access to an entire set of K12 th th curriculum content (6 to 12 grades) and has relaunched the offering within schools under ‘iSchool’.. While Educomp Solutions leads the market with its product ‘Smart Class’.000 (we have assumed 10 th th classes per school). Assuming 1. Everonn has improved its score on the parameter of Content (annuity and differentiated product) – but for the longer term. Everonn plans to extend this offering to afterschool coaching as well (Everonn has acquired Toppers Tutorial and has access to IIT-JEE content). Currently in a scale-up mode.2m. these courses are optional for students and therefore do not bring in annuity revenues. While we expect 60% CAGR in VITELS revenues over FY08-11. The curriculum content is stored on the local server within the school.
vSchool – non-curriculum based optional courses
iSchool . cordless mike and a set of speakers. Under this model. Given higher volumes and lower marketing expenses (the product needs to be marketed only to schools and not to both colleges and students as in VITELS for colleges) and a strong operating leverage (each studio offering VSAT facility to colleges can be used across ~200 schools). Everonn sets up (one or more) virtual classrooms within the school and offers non-curriculum based lectures and courses to students via VSAT.000 private schools. Everonn has relaunched its schools business (vSchool and iSchool) to get a pie of the action. the current market penetration is less than 3%. at an average fee of Rs100 per student per month. With this model. Given the low penetration. What is vSchool? Within its schools offering.getting ‘smart’ with an annuity product…
. the employment-focused courses have a short life and are not compulsory for students.. While the content offering (VITELS in colleges) is unique and has operating leverage. we expect the $90m market to see a 60% CAGR over FY08-12. This product offers curriculum content which is compulsory for students within the schools. underpenetrated market
Everonn is present within the high-growth Multimedia to private schools space. a computer and an LCD projector. With 75.

the third largest player in the high-growth ICT market.IDFC-SSKI INDIA
Extending VITELS – a retail initiative
Levering the vocational training content…
Everonn. the company expects to provide coaching within its new centers and through existing schools under its portfolio. is well placed to tap the opportunity. the company plans to tap into the IIT and AIEEE training markets (for entry into engineering courses) more aggressively. With 400. We expect Toppers Tutorial to add significant revenues post FY10.
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. ETS is world’s largest private (non-profit) body for conducting GRE and TOEFL exams around the globe while Thompson Prometric is a leading testing service for providing IT certifications like Microsoft.
…as also the infrastructure
Other businesses
Entry into IIT trainings – the largest market within coaching classes segment
Everonn has acquired Toppers Tutorial. the company offers various certificate and skillenhancing courses to cater to the vocational training needs of corporates and students. provides VITELS services to retail customers as well. Everonn has also tied up with IIM-Indore in order to provide management programmes to executives (seated in Everonn centers) through VSAT technology. through 29 leased centers. Leveraging its existing content. we expect the segment to witness aggressive 60% revenue CAGR till FY08-11. we estimate the IIT training market to be $420m. an IIT coaching center (test prep market). With an estimated capex of ~Rs250m. Going forward. Going forward. Everonn has tie-ups with ETS (Education Testing Services) and Thompson Prometric for the use of its centers for various tests conducted by these entities. While a relevant player in the ICT space. Everonn has identified vocational training and school management as key focus areas. we initiate coverage on the stock with a Neutral recommendation (8. overall.4x FY10E earnings). we see 54% revenue CAGR for Everonn over the next three years. the business is expected to contribute substantially only FY10 onwards.
Expect 54% CAGR in revenues over FY08-11…
A robust 54% CAGR in revenues over FY08-11E…
Everonn Systems. Everonn is looking at various other ways to lever the centers and plans to bid for an alliance with IIMs (Indian Institutes of Management) to conduct the CAT (Common Entrance Test) when it goes online in FY09.000 students vying for a seat in the premiere institute. and for conducting various tests and certifications. the L1 business offers limited value creation potential.
FINANCIAL ANALYSIS AND VALUATIONS
We expect 54% revenue CAGR and 44% earnings CAGR for Everonn over FY0811. for Rs10m. With low revenue visibility for the year ending FY09. Other revenue streams under the retail initiative include leasing the infrastructure to corporates for their training activities. With Everonn’s increasing focus on VITELS (colleges and especially schools). ICT business currently dominates the revenue mix and we expect 48% CAGR in the business over FY08-11. With the annuity offering (iSchools) forming ~25% of revenues till FY11 and the need to expand its portfolio. At 58% of revenues.

..Low
Creativity Everron Systems
Source: Company. Neutral
. we initiate coverage on Everonn with a Neutral recommendation and a price target of Rs238 (19% upside from the CMP). Everonn needs to expand its portfolio and create a stronger annuity business model to reduce dependence on the non-value creating ICT business. In our view.IDFC-SSKI INDIA
Model needs higher annuity and wider portfolio. The lumpy and non-annuity based revenue stream from VITELS is a key risk to our numbers.yet low IQ – ICT continues to dominate topline (low RoE). annuity to form ~25% of revenues by FY11E
Everonn’s high dependence on ICT (a commoditized L1 business) is expected to come down in favour of ‘value creating businesses’ such as VITELS (colleges and schools). While the company is aggressively focusing on iSchools (an annuity product). While we have assumed a recurring revenue stream from the existing and additional colleges.
Exhibit 12: IQ . we expect the stream to contribute ~25% to revenues by FY11. the model lacks annuity inherent in other Multimedia products (Educomp’s Smart Class). IDFC-SSKI Research
Content
Capital
Credibility
IQ
JANUARY 2009
100
.4x FY10E earnings. At 8.

IDFC-SSKI INDIA
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JANUARY 2009
101
.

INVESTMENT ARGUMENT
In a difficult-to-scale business, NIIT has established itself as the largest player in the vocational trainings space of IES with focus on IT/ ITES using the franchisee model. While the IT services business was hived-off, the company is now active in the $1.5bn vocational training space (~25% CAGR over FY08-12E) and has renewed focus on the $160m school learning solutions business (70% CAGR). However, with NIIT generating 90% of revenues from retail IT and corporate trainings verticals, it is bound to feel the heat of the global meltdown. In view of the 11% revenue CAGR expected over FY08-11, we initiate coverage on NIIT with a Neutral rating (7x FY10E core earnings – excluding profit from associates).

NIIT: LEADER IN THE INDIAN IT TRAINING MARKET
NIIT 4.5x the second largest player within the IT training space

A pioneer with a three-decade presence in non-formal IES (IT trainings), NIIT has built formidable scale relative to peers (revenues of Rs10bn in FY08; 4.5x that of Aptech – the second largest player). While the Indian IT training industry witnessed rapid growth 41% CAGR) over FY96-01, NIIT rode the wave as a leader in retail IT trainings. Subsequently, to focus on pure education training, the company spun off its IT services business into a separate entity named NIIT Technologies in FY04 (NIIT currently holds a 25% stake in the associate).

Business overview
NIIT strengthening its portfolio within ILS, SLS and CLS

NIIT has extended its retail IT training offerings (ILS – Individual Learning Solutions) to other emerging economies apart from India, entered into the ICT space – a PPP initiative with the state governments to provide IT infrastructure and services to public schools (SLS – School Learning Solutions), and into the corporate trainings market in the US (CLS – Corporate Training Solutions). The company has recently extended its footprint to new businesses within retail trainings to FMT – Financial Management Trainings and BPO/ KPO Trainings. NIIT’s revenue mix has undergone a sea change after the acquisition of Element K – a US corporate training company (the second largest corporate training delivery company globally) in August 2006.
Exhibit 1: A changing revenue mix
FY06
FY08 ILS 35%

Currently, CLS contributes 55% to its revenues from 37% in FY06. Further, share of SLS business in revenues has dropped from 26% of revenues in FY06 to 10% in FY08, primarily because NIIT has been going slow on bidding for any new ICT (Information and communication technology, a PPP in public schools) projects ( due to delayed payments by a few states for its services). With revenues at Rs10bn, NIIT is not only the largest player within the IT Training space but across the USD 50bn IES. ILS contributes to 32% of the revenues - NIIT has pioneered a content driven franchisee approach to achieve scale (828 centers till date) within a largely fragmented and regional space. With the revival of the IT industry NIIT Ltd has seen a 49%CAGR in revenues from ILS over FY06 to FY08. At 51% of revenues currently, CLS dominates the topline (55% of revenues in FY08). Remaining 10% is contributed by SLS.

CLS now dominates the topline (55% of revenues in FY08), followed by ILS

The global meltdown has cast its shadow across geographies and sectors. Besides IT/ ITeS, the corporate trainings market is also reeling under the impact of the widespread recessionary trends. With 90% of NIIT’s revenues coming from the retail IT and corporate trainings verticals, the company is bound to feel the heat – while CLS is expected to register only ~2% CAGR over FY08-11, growth in ILS too would be tempered (16% CAGR over FY08-11E against 46% CAGR over FY06-08).

Unlike NIIT’s other businesses, corporate training solutions (55% of revenues in FY08) caters primarily to the US and EU geographies with only ~8% of segment revenues accruing from India. The slowdown across these economies has led organizations to trim their training budgets, which has resulted in single-digit growth for the business over the last two years. Going forward, we expect ~2% CAGR in NIIT’s CLS business over FY08-11. In this space, NIIT caters to universities, technology and non-technology companies, training corporations and publishing
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IDFC-SSKI INDIA

houses. The three sources of revenue within this segment include learning products, custom projects and training delivery. Within learning products, NIIT implements an e-learning system for clients on its learning technology platform; here, it competes with Skillsoft – the largest player in the space after acquisition of NETg. Within custom projects, NIIT develops custom content for clients and leverages on the offshore labor costs (competitors within the space include Tata Interactive Services and Excelsoft). A small part of its revenues comes from training delivery that involves training employees/stakeholders of client companies.
Exhibit 3: Corporate Learning Solutions market
Corporate learning market Training Delivery & Admin 14% India 8%

Out of USA’s ~$60bn spend on corporate trainings every year, $3bn-4bn is estimated to be outsourced. However, corporate trainings are classified under discretionary spending and hence vulnerable to slowdowns in macroeconomic environment. With the learning products and training market bound to be sluggish, the custom projects market would remain flat (with a negative bias) in the coming years. We expect CLS to grow at ~2% (in rupee terms) in the coming years. While NIIT has also forayed into the English training segment and acquired Evolv (47.9% stake) in January 2008, we feel NIIT should exploit the potential offered by the Indian and other high growth markets. Element K – good acquisition, bad timing With the entire corporate training space within the US witnessing consolidation, NIIT acquired Element K at $40m (~0.5x revenues) in August 2006. With the acquisition, NIIT has access to the second largest content library in the US after Skillsoft (which acquired NETg – a USD 150m company at ~1.5x revenues and became the single largest player within the space). At the time of the acquisition (CY05), Element K had revenues of $83m and an operating loss. With one of the largest e-learning content libraries and its own technology platform (K-Hub) as also an existing client base, NIIT had expected to derive synergy benefits and thus improve profitability over three years. However, despite a stronger product portfolio within CLS, the sharp economic downturn in the US will now not allow the expected benefits to be realized over the estimated period. Nevertheless, we expect the acquisition to be positive for NIIT over the longer term.
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Post Element K, NIIT has the second largest content library in the US

A sharp economic downturn clouds synergy benefits in the near term

JANUARY 2009

NIIT caters to IT training needs of non-engineers (GNIIT – a 3-year diploma done usually simultaneously with graduation courses) and engineers (various short-term courses). we expect sluggish growth for retail IT trainings market in H2FY09 followed by a significant slowdown in FY10.000
40. With 828 centers globally. 66% of systemwide revenues from India
At 91% of ILS revenues. TTM hiring data for Infosys. IT trainings dominate the segment.5x Aptech.000 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Source: IDFC-SSKI Research.IDFC-SSKI INDIA
Retail IT trainings business – sedate growth
NIIT is the largest player within the retail IT training space (4. NIIT earns ~35% of its system-wide revenues (revenues collected by all – owned and franchisee – centers) from China and ROW. Within this segment.
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107
.
Exhibit 4: Retail IT Trainings market
Systemwise revenue mix (by geography) ROW 17%
China 17% India 66%
Source: Company. the second largest player).
NIIT has 828 centers globally. we estimate 16% CAGR in revenues from retail IT trainings till FY11 (46% CAGR over FY06-08).000
50. IDFC-SSKI Research
A drop in net IT hirings in H1FY09 – slowdown in IT training revenues
In view of slowdown on fresh recruitments in the IT sector in H1FY09.000
70.
While the short-term courses offered by NIIT will support growth to an extent.
Exhibit 5: Slowdown in IT hirings
80. Satyam IT and HCL Tech. TCS. Wipro global services.000
60. It has scaled up primarily on the back of the IT/ ITES space emerging as one of the largest employers in the country and the continuous need to adapt to newer technology through trainings.

NIIT is now levering its credibility to new ‘high-growth’ areas of the individual trainings segment such as BFSI (banking.
Exhibit 6: New businesses – tie-ups with key partners IFBI (Institute of Finance Banking & Insurance)
Financial (BFSI) Training 81% stake in IFBI. C and L
Imperia
NIPE (National Institute of Process Excellence) . 19% held by ICICI) to set up a subsidiary (IFBI) in August 2006 in order to address the training needs within the financial. NIIT saw a 56% increase in enrollments. management and soft skills training
With strong presence in IT trainings. management has cut its estimates
JANUARY 2009
108
. Imperia (management trainings): NIIT has also launched Imperia in association with leading educational institutions such as IIM Ahmadabad. marketing or HR using virtual classrooms. Going forward. leading to revenue growth of ~62% yoy. banking and insurance space. financial services and insurance). Indore. While these businesses are expected to be profitable this year. ICICI Prudential ICICI Lombard and Infosys (providing training on its banking software platform – Finacle). especially within financial services. NIIT has launched NIPE (National Institute of Process Excellence).
NIIT offers virtual trainings in management through Imperia
A JV with Genpact for BPO trainings
In view of slowdown. especially any slowdown in the financials sector. Calcutta and Lucknow. To strengthen its offerings. YES Bank. To account for the same. In H1FY09. Further. Live sessions are delivered by IIM professors in their respective cities to students sitting in specially designed classrooms in six cities across India.Uniqua
BPO/ KPO Training A 75:25 JV with Genpact (the largest BPO)
Growing presence in BFSI trainings through IFBI (19% held by ICICI)
IFBI (Institute of Finance Banking & Insurance): NIIT invested Rs40m (80% stake. I. for providing training to the ITES industry under the brand NIIT Uniqua. the management has downgraded its target revenues from Rs750m to Rs450m for FY09. Imperia offers executive management programmes in the field of finance. we expect a subdued 20% CAGR in the business over FY08-11 as it is quite sensitive to macroeconomic conditions. there is a significant slowdown likely in the verticals due to the prevailing tough economic environment. management and soft skills trainings. which is a 75:25 JV with Genpact (the largest BPO). remaining held by ICICI Source: Company.IDFC-SSKI INDIA
New opportunities in retail (vocational) training – short-term pain
NIIT levering its presence to BFSI. IDFC-SSKI Research Executive Management Training In association with leading educational institutions such as IIM A. NIIT has tied up with key partners in each of these segments. NIIT now has partnerships with various banks such as HDFC. Kotak Mahindra Bank.

of schools (till FY08)
6. we expect margins to expand in the business (~13% currently. Science. NIIT now offers a bouquet of products such as IT Labs. etc). etc). Further. The bidding method is now no more purely on L1 basis.860
Volumes to rationalize the costs leading to improvement in margins
Going forward. and has recently launched an
109
Moving from low-yield IT content offerings to complete interactive solutions across subjects
JANUARY 2009
. segment. NIIT has provided computer-based learning to over 7. they have been primarily pure IT content products. subindustry average due to high operating costs and flat volumes) as more schools come to NIIT’s ICT fold. IDFC-SSKI Research
NIIT second largest player within ICT. and thus highgrowth. In addition.915 public schools till date). NIIT has been a laggard in the highly underpenetrated.004 4. it is second only to Educomp Solutions (market leader with 8. MathLab and others labs (English.665 public schools.164 2. Multimedia in private schools – creating a new product portfolio While NIIT has implemented multimedia products in 1. the existing contracts would roll into pure services contracts and thereby drive an improvement in overall margins.IDFC-SSKI INDIA Exhibit 7: New business expected to turn profitable in FY09
(Rs m) 750 Net Revenues EBITDA
525
300
75
-150 FY07 FY08 FY09E FY10E FY11E
Source: Company. NIIT is strengthening its product portfolio with newer content. However. While NIIT was going slow on bidding in the ICT space due to unfavorable economics (delayed payments from various states. the improved business dynamics have prompted it to show renewed aggressiveness. ~60% of a state’s ICT cash outflow is assured by the Centre. IDFC-SSKI Research
Renewed aggressiveness in schools – too little but not too late
School learning solutions business (ICT in public schools and Multimedia in private schools) contributes 10% to NIIT’s revenues. but has evolved into a two-stage process of L1 and T1 (technical bid). which means speedier clearance of dues for ICT suppliers.803 schools till date (including 1. Under the brand e-guru. improving dynamics elicit renewed aggressiveness
No.
Exhibit 8: NIIT – a dominant player in ICT Players
Educomp NIIT Everonn Compucom Source: Company.131 private schools till date.138 private schools).652 3. With 981 schools by FY08 (22% yoy growth). ICT – once again a dominant player With NIIT having implemented ICT in 6.

Expect 11% CAGR in revenues over FY08-11
Single-digit growth in CLS and slowdown in ILS to impact overall growth
NIIT derives a large chunk (55% in FY08) of its revenues from CLS – a US-focused business.000 Q1 FY06 Q2 FY06 Q3 FY06 Q4 FY06 Q1 FY07 Q2 FY07 Q3 FY07 Q4 FY07 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09
Source: Company. Given that the geography is in the throes of a long and deep recession.500
5. leading to an overall 11% CAGR in revenues over FY08-11E.000
3.
FINANCIAL ANALYSIS AND VALUATIONS
NIIT is expected to show a sedate 11% CAGR in revenues over FY08-FY11E as growth in CLS. The schools can choose from the bouquet or opt for the entire product offering at Rs40-250 per student per month. Growth pangs would further be compounded by the considerable slowdown in retail trainings space (16% CAGR in NIIT’s retail IT training revenues over FY08-11E as against 46% CAGR over FY0608). it holds scale-up potential. we expect ~2% CAGR in the business over FY08-11.000 EOP Schools
6. we expect growth rates to be tempered or slower than for stronger peers.IDFC-SSKI INDIA
interactive classroom product (an integrated product with hardware and software similar to ‘Smart Class’ by Educomp Solutions).
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110
.
Exhibit 9: Realigning focus towards the schools business
(nos) 8.5bn. IDFC-SSKI Research
High growth businesses yet to contribute substantially to consolidated growth
Despite realigned focus on the high-growth. In other segments too. market offers immense potential to grow
While the high-yield integrated product has been implemented in 12 schools so far. we estimate ~30% revenue CAGR for NIIT in this business over FY08-11E on the back of an improving product portfolio and underpenetrated market (<3% of private schools) offering a potential in excess of $1. underpenetrated ICT space and a better product portfolio in the Multimedia to private schools market.
Though a laggard. is restricted to low single digits in view of the recessionary environment in the US and EU. the largest segment in terms of revenues. Though we expect NIIT to lag stronger peers having wellentrenched content and distribution networks.500
2. the contribution of the annuity businesses (at 16% of revenues till FY11E) is not significant to boost growth at the consolidated level.

At 7x FY10E core earnings (excluding the value of 25% stake in NIIT Technologies and a 50% holding company discount). with highest revenues in IES and an unleveraged balance sheet size of Rs6bn.
Exhibit 11: IQ – low
Creativity NIIT
Source: IDFC-SSKI Research
Content
Capital
Credibility
IQ
JANUARY 2009
111
. NIIT offers low IQ at current valuations. More importantly. the stock appears to be fairly valued
NIIT. exhibits Credibility (management intent & ability) and Capital (built to last). given the prevailing economic slowdown (90% of business highly sensitive to the macroeconomic environment). driven by increasing capacity utilization in IT trainings (management has indicated a slowdown in capacity additions) and new businesses turning EBITDA-positive for the year. While the company is working on building an annuity business model (SLS). IDFC-SSKI Research
Margins expansion to prop earnings growth
Higher capacity utilization in retail training centers progress in schools business to rationalize costs
NIIT is expected to witness a ~160bp margin expansion over FY08-11.000
2% 3%
8.
Flatters to deceive – stock fairly valued. Margins would also expand as the high-margin school learning solutions business scales up and the currently high operating cost base rationalizes. NIIT has not exhibited strong Content (to differentiate and build annuity) and Creativity (to ‘manage’ the over-regulated environment in order to address the larger formal IES).IDFC-SSKI INDIA Exhibit 10: ILS and CLS see a sharp fall in growth rates
16. we do not expect significant contribution from these businesses over our forecast period.000 ILS SLS CLS
CAGR over FY08-11E
11% CAGR
12. we initiate coverage with a Neutral rating and a price target of Rs27. Neutral
Lacking creativity and strong content.000
16%
0 FY08 FY09E FY10E FY11E
Source: Company. However.000
30%
4.

we believe that it’s established Credibility (management intent and ability.IMA) Rs347m
Nepal Campus
(Medical College) 100% subsidiary Rs499m
Professional Skills
(Various short-term courses) Rs74m
Malaysia Campus
(Medical College) 49% associate Rs383m
International Center for Applied Sciences
(Offered through MU) Rs121m
U21
(50% associate) Rs278m
Treasury Income
Rs79m
Others
Rs949m
Source: Company. Dubai. Having achieved significant scale within IES.429m Rs526m 88% acquired by MUL
Antigua Campus
(Medical College) 100% subsidiary Rs1. yet. consolidated balance sheet size at Rs20bn) and brand will be MUL’s key strengths. across geographies within the HE and vocational training space.556m
Distance Education
(through SMU) Rs2. MUL plans to grow through both the organic and inorganic routes. MUL has gross revenues of Rs8.186m Growth ~25% yoy
MeritTrac MUL India
Rs3.
Exhibit 1: Revenue mix – FY09
Manipal Universal Learning (MUL)
Revenues (FY09) Rs8.141m (net margins at ~8-10%). MUL is the only formal education player to have received sponsor-funding ($30m from IDFC Private Equity and $40m from Capital till date).SSKI INDIA
Manipal Universal Learning (MUL)
Maverick in Higher Education
UNLISTED
Manipal Universal Learning (MUL) has strong brand equity within the HE space through Manipal University and Sikkim Manipal University (MUL sells services to the two Indian universities within the Manipal Education group). While the Indian operations are at ~49% of revenues. the modular nature of majority of the business makes it capital-intensive.IDFC . MUL is well placed to create a rich growth funnel across the HE space.955m Growth ~35% yoy
International Operations
Revenues Rs4. With a strong Content offering (an annuity business model). run as private limited companies). Antigua and Malaysia.807m
Dubai Campus
(Non-medical) 51% subsidiary Rs521m
Corporate Trainings
(ICICI Manipal Academy . Going forward. its international HE businesses dominate the topline (revenues primarily from four institutes in Nepal. IDFC-SSKI Research
JANUARY 2009
113
. Given that HE is a long-term and a very capitalintensive business (~Rs5bn required to set up a medical college).141m
Domestic Operations
Revenues of R s3.

Manipal University. Under this program . MUL’s primary competitor and the largest distance education provider in the country is IGNOU (Indira Gandhi National Open University) – a government entity with a base of 500.IDFC .000 468. SMU is a significant player in the distance education space. One of the key growth drivers for the international business.000 students. Currently. Pokhra (Nepal) is a 100% subsidiary. Antigua is a popular destination for American students to pursue medical education at substantially lower rates as compared to their home country. students can do part of their course locally and the remaining on the overseas campus.
Exhibit 3: SMU .444
Study centers
550 1. Currently. Antigua and Nepal – countries where ‘for-profit’ education is permitted.
• • •
MUL manages education programs for its Malaysia and Antigua campuses wherein a student has the opportunity to complete part of his/her studies at the Manipal campus and the balance at Antigua or Malaysia.
NON-FORMAL EDUCATION INITIATIVES: IN INFANCY
In order to capitalize on India’s growing need for vocational training. a significant part of the investment for the international business (~$30m) is expected to be used for extending loans to students in Antigua as funding options for private education have dried up in the current global cash crunch.a significant player in the HE space Semester Enrollments
SMU IGNOU Source: IGNOU 140. Information Technology / BPO. Malaysia is a 49% associate which is expected to see single-digit growth (led purely by higher yield per student). significant capital is required by MUL to add to/ acquire capacities to sustain future growth (~25% over the next 2-3 years). Malaysia.SSKI INDIA
SMU – a significant player within distance education
With ~140. Telecom. for which it has entered into tie-ups with various universities in USA. Manipal College of Medical Sciences. MUL is diversifying into non-formal education areas. through tie-ups with international colleges. Caribbean) is a medical college and a 100% subsidiary expected to grow at ~30% going forward driven by improving yields and higher capacity (MUL plans to invest $25m in a new campus). UK and Australia. the programmes offered by MUL cover six key sectors: Banking. Further. MUL has the following international campuses: • American University of Antigua (Antigua. Media and Retail. Dubai is a non-medical college – expected to grow at ~30% as capacity expands (MUL plans to invest $20m in a new campus).000 enrollements and 550 LCs. Though an annuity business.
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115
. It also runs a unique programme for engineering through its International Centre for Applied Sciences (ICAS) at Manipal Campus. expected to grow at ~15% on the back of improving yields. Infrastructure Services. Melaka-Manipal Medical College.621
GLOBAL APPROACH: NEEDS CAPITAL TO GROW
MUL has grown outside India using both the organic and inorganic routes and currently has significant presence in the international HE space with campuses in Dubai.

it has also expanded its non-formal initiatives with two key acquisitions.
Exhibit 4: IMA (ICICI . The only risk is the sensitivity of corporate training spends to economic cycles. Currently clocking revenues of ~Rs278m. MeritTrac has recently tied up with NASSCOM to provide a common testing standard for IT recruitments all across India.000 sq. MUL has acquired an 88% stake in MeritTrac – India’s largest testing and skills-assessment company – providing quantitative inputs in order to measure the competencies of corporates.Manipal Academy)
• ICICI takes charge of admissions. At Rs526m. The first batch of 480 students commenced on 21 January 2008 in Hyderabad. with 200. While the cost of content development is prohibitively high at present and the business has yet to turn profitable. the venture is loss making at operating level. Guest faculty includes people from ICICI Bank and senior industry professionals
Source: Company
Inorganic is the way to grow
MUL has used the inorganic route within the formal education space. Curriculum designed by Manipal and ICICI together and course delivered by IMA • Manipal invests in exclusive campus. which is a 1-year campus programme for new recruits sponsored by the employer (guaranteed employment with ICICI after completion of the course). it charges a mutually agreed fees per student to ICICI
Structure of colla boration
• Applicants require to be graduates from any discipline. MUL has also acquired a stake in U21 Global (revenues of $4. Full-time faculty having minimum five years of relevant industry experience. faculty and facilities. MUL is currently in talks with other corporates for similar collaborations.SSKI INDIA
MUL has illustrated the potential for industry-academia collaborations by establishing ICICI-Manipal Academy (IMA).2m) – a Singapore-based online education company providing online MBA programmes.
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116
. ft of built-up area • A teacher student ratio of 1:15/20 is targeted. join ICICI as Assistant Manager (Band 1 grade) after completion of course Programme design • 1-year residential programme – nine months of classroom training and three months of internship • ICICI provides students with a monthly stipend during classroom training and internship • PG Diploma in Banking awarded at end of programme with an opportunity to carry credits and continue for MBA in Banking through distance education mode • Facilities in Hyderabad and Bangalore Infrastructure • Hyderabad facility is a leased building. Both these acquisitions are expected to grow at 25-30% yoy going forward. admissions based on a written entrance test and interview • Students deemed employees of ICICI on admission into IMA. Bangalore facility is a campus (also leased) of 7 acres near Jakur. the venture is currently profitable at the operational level but loss-making at the net profit level.IDFC . we expect costs to be recovered faster as economies of scale set in with a growing customer base.

While ability to raise capital is the key monitorable going forward. IDFC Private Equity ($30m)
Content
Differentiate & build annuity
Established credibility over last five decades with world class institutions like Kasturba Medical College
Strong pricing power (a function of high quality courses) and students captive for 3-6 years
Source: IDFC-SSKI Research
MUL has attained considerable scale and with a consolidated balance sheet size of Rs20bn and revenues of Rs8.141m.IDFC . we expect the company to emerge as one of a dominant player within IES. MUL has been the only player in formal IES to have seen private equity funding ($30m from IDFC Private Equity and $40m from Capital till date) and this infuses confidence in its ability to fund its future growth.SSKI INDIA Exhibit 5: High I Q
Credibility
Management intent & ability
Capital
Build to last Balance sheet size of Rs20bn (FY08).
Exhibit 6: Investability Quotient
Creativity Manipal Education
Source: IDFC-SSKI Research
Content
Capital
Credibility
IQ
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117
. Funded by Capital ($40m). we expect ~30% growth going forward. Other businesses lack the operating leverage enjoyed by SMU and need substantial capital in order to grow. While 49% of its revenues come from India operations (predominantly through the distance education programmes offered by SMU. which has high operating leverage).

The university has strong focus on research and is the largest private recipient of funds for research from the Government of India.IDFC . dental. 40 more India-wide Presence Rapidly growing
Manipal Education
Manipal Acunova Stempeutics
Regenerative Medicine: Stem-cell Research
Corporate Manipal Universal
Not-For-Profit Manipal University Sikkim-Manipal Univ
Source: Company
With two universities and more than 30 institutions/ colleges in its fold. Dubai. information sciences. Manipal Education has a base of 158000+ students across campuses in India.000+ students of 53 nationalities. Malaysia and Nepal (footprint in 19 countries).SSKI INDIA
GROUP BACKGROUND
MUL (Manipal Universal Learning – the corporate entity) belongs to Manipal Education (a part of the Manipal Education & Medical Group). allied health sciences. etc to 18.
Exhibit 8: World Class Infrastructure
Source: Company
Manipal University – world-class infrastructure
Manipal University: It is India’s first private university offering 12 professional streams through its 17 institutions. While MUL houses the ‘for-profit’ education interests of the group. Antigua. The university offers various programmes in the areas of medicine. biotechnology.
Exhibit 7: Company structure
The Manipal Education & Medical Group
Manipal Healthcare Manipal Cure & Care
14 Hospitals. One of the few profitable players in the private higher education market. engineering. Manipal Education has been used an innovative structure to capitalize on spends on HE (Indians spend $20bn annually on HE in India and outside). ‘not-for-profit’ education initiatives are carried out through Manipal University (a deemed university) and Sikkim Manipal University (a state university). The statistic assumes significance in the backdrop of the fact that there is little private sector or
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. 7200+ beds Two outlets.

one of India’s leading accounting & consulting firms. satellite lectures and face-to-face coaching is used to impart education. A blended pedagogy combining study-and-instruction material. These Learning Centers cannot provide content or hold exams. Leading Manipal Education for the last 25+ years Dr Gajraj Dhanrajan: A leading educator from Malaysia. and the Founder of Centre for Policy Research . Manipal University Mr Anand Sudarshan: Managing Director & CEO Manipal University has an eminent and active Board of Governors.
Management Profile
Manipal Universal is a board-directed corporation. Manipal Education & Medical Group Dr H S Ballal: Pro-Chancellor. The Learning Centers are located in various parts of India in collaboration with a local entrepreneur. and a leading member of the Indian intelligentsia Mr Mohandas Pai: A member of the board. IDFC is a leading Indian infrastructure fund Mr Vivek Kalra: Partner – Global Private Equity. Sikkim Manipal University: The first university in India to be built on the Public-Private-Partnership (PPP) model. Mr T V R Shenoy: A veteran journalist. Leading Manipal Education for the last 25+ years Dr Pai Panandikar: A leading Indian economist. Singapore Dr Ranjan Pai: Executive Chairman. Its roster includes: Dr Ramdas Pai. He also heads the Academic Council Mr E A Kshirsagar: Former Chief of A F Ferguson. Chancellor: A pioneer in higher education in the country. former Advisor to the Prime Minister of India. He also heads the Audit Committee Mr Luis Miranda: CEO of IDFC Private Equity. Former Member of the Planning Commission. Capital International. The university has close working relationships with the corporate sector for applied research programmes – these include MNCs such as Philips. Sikkim Manipal University is located in the north-eastern state of Sikkim. and almost all universities rely entirely on the Government of India for funding of research. Chairman: A pioneer in higher education in the country. GE and Intel. and former Union Power Minister Mr K V Kamath: Chairman & CEO of ICICI Bank (2nd largest private bank in India).SSKI INDIA
foundation-driven funding available for research in India. and Head of HR & Administration at Infosys – a leading Indian Information Technology firm
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. Mr Suresh Prabhu: Member of Parliament. The Board of Directors is as follows: Dr Ramdas Pai.IDFC . Apart from campus-based programmes in medical and engineering. with specific expertise in distance education. the state university offers distance education courses through 550 Learning Centers (20+ overseas in the Middle East and Africa) using VSAT technology (2-way audio and 1-way video).

where state boards and NCERT have a monopoly). In this backdrop. However.240
200 90 100 na
150+ 100+ 100+ na
(some CBSE schools) Private players Private players Private players
510
1.
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. International publishers (international schools). of publishers
1000+ 400+
Text books prepared by
Private publishers SCERT (state boards).
Publishing segment – ‘leader’ in supplementary books market
Primarily a provider of domestic supplementary books within Maharashtra and Gujarat. scalability is difficult to achieve in this business given the high level of market fragmentation and low-growth as reusability of books is high (a large second-hand books market).IDFC .750
450 90 200 100 200 1. private publishers
Secondary Higher Secondary Graduation Post Graduation Professional Books Total Market ($ m) Total accessible market ($ m) (only 5% of the school books market is currently accessible due to market distortions) Source: Company. we expect low growth (12% CAGR over FY08-12) for the company in the coming period as the market is highly fragmented and there is a large second-hand books market (an estimated ~70% of the target customers reuse books). Navneet Publications is present in the $510m supplementary books market which offers a free play to private players. ICSE. and also operates in stationery (33%) and the multimedia in schools (e-books. we expect overall growth to be slightly higher (16% CAGR) driven by the stationery segment and the new initiative to tap the high-growth Multimedia to schools space. CD-ROM. Supplementary books market – a free play We estimate the books market in India to be $1.5 UNRATED Mkt Cap: Rs3.SSKI INDIA
Navneet Publications
Book worms grow slow
Rs41. In the publishing business.047
537
510
While a large part of the school text books market is out of reach of private publishers (text books are generally published by the various state boards and NCERT – National Council of Education Research and Training). IDFC-SSKI Research
10-15 16-17 18-21 21 onwards Working professionals 1. and success is equated with high marks. Even as Navneet Publications is a leader in this market. Navneet Publications also has small presence in the international children’s and general books segments. etc) spaces. supplementary books (reference books/ books with exam-focused questions and answers) have gained high significance.9bn.
Exhibit 9: Indian books market – a snapshot Age (years)
Pre primary Primary 3-5 6-9 200
Text books (US $m)
Supplementary books (US$ m)
30 90
No. The Indian education system is examination-centric. While we expect a sedate 12% CAGR for Navneet in its publication business over FY08-12. NCERT (CBSE board). the company is a leader in a segment that offers free play to private publishers (unlike for textbooks.75m with textbook market at $1.2bn and supplementary books market at $510m. US$79m
Navneet Publications is a publisher of syllabus-based supplementary/ reference books in Maharashtra and Gujarat (66% of FY08 revenues).

IDFC-SSKI Research
Primary/Secondary (Std 1 to Std X)
Higher Secondary (Std XI to Std XII)
Post Higher Secondary
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.
Exhibit 10: Navneet’s prime focus – SCERT curriculum
Government of India
Ministry of Education
NCERT (National Council for Education Research and Training
ICSE (Indian council for Secondary Education)
CBSE (Central Board of secondary Education)
SCERT (State council for Education Research & Training)
Source: Company
Strong regional language content – a key strength As a large chunk of school students attend vernacular institutions.
Exhibit 11: Need for books in regional languages
(% of students) 100 70 75 50 50 30 25 15 20 50 Regional 85 English
80
0 Preprimary
Source: Company.000 owned titles in English and 11 other Indian languages with ~200 new titles being added every year.IDFC . As of date. Navneet has over 5. publishers need to produce text books/ supplementary books in various regional languages. Navneet Publications has been catering primarily to state board school students (following the SCERT – State council for Education Research & Training – curriculum) in Maharashtra and Gujarat since 1959.SSKI INDIA
A leader in the highly fragmented supplementary books market.

8 14. the Middle East. which is in the business of publishing children's books in Spanish and other European languages.6 743.6
FY05
2748.The company has also stated its intent to introduce examinationoriented CD-ROM products (a product for Gujarat CET launched in January 2008.5 352
FY07
3322.e.2 90.8 848.000 CD-ROMS by the end of the year. Navneet has a strong distribution network.3 2757.6 196 541. However. USA and Europe. Marathi and Gujarati.IDFC .3 4319. the company acquired ‘Grafalco’ (a 30-year old brand) through a subsidiary in Spain.2 104. Navneet expects to sell 20.4 743 21.5 614. etc) and presence of a large second-hand books market (70% of the target market reuses books). the project is currently in the pilot phase.1 92.5 89. the company has chosen to expand vertically in the multimedia for private schools space in these regions. when new academic sessions commence in schools). Everonn and NIIT. The stationery business lacks scalability as it is seasonal in nature with majority of sales accruing within the first quarter (i.6 -159. Overall. Santej and Dantali) and 25 branches across India. execution remains a key monitorable as Navneet will have to contend with strong and established players like Educomp. e-learning (Multimedia in private schools) – a new initiative Navneet is a leader in the supplementary books space in Maharashtra and Gujarat. we see it as an aberration as the state school boards in Maharashtra and Gujarat had changed the syllabus for SSC schools in the year.2 117.5 336.4 635.4 589.6 579. The company has recently launched non-paper products (3% of segment revenues) and the remaining 22% of revenues come from exports. Navneet plans to cater to this segment. For its new initiative.7 721.5 889 40. Silvassa. To further expand its reach.6
FY06
2962.1 497 143.5 425. the company expects 50% growth in the export business.6 461. we expect 30% CAGR in Navneet’s stationery business over FY08-12.SSKI INDIA
Low growth market Navneet has five manufacturing facilities (one each at Vasai.000 retail outlets for its various products. we expect only 12% CAGR for Navneet over FY08-12 as the overall books market is inherently a low growth business. The company expects to spend ~Rs90m to launch the product.3 21. Going forward.9 206. With 60.000 secondary schools in the two states.000 copies already sold). While the segment offers market potential in excess of $1.5bn with just 5% penetration.9
FY08
4111.4 3514.7 3104. This is primarily due to the low sell-through (100% students do not buy books and refer to class notes. Of the 23. As a part of this initiative. Navneet has created an e-book (restricted to the content in text books) in order to tap the lucrative high-growth Multimedia in schools market. With plans to focus on Maharashtra (10th grade) and Gujarat (1-10 grades) and on content in English.5 25. 95% are run by state boards – most of them being vernacular. instead of expanding to other regions of the country.1 594.8 503.
Exhibit 12: Key financials (Rs m)
Net Sales Other Income Stock Adjustments Total Income Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Adjusted Net Profit Source: Companies.
Stationery segment – exports expected to boost growth
The stationery segment primarily comprises domestically sold paper products (75% of Navneet’s segment revenues).2 50 158. Daman.3 14. 2.2 27. Navneet is a leader in premiere stationery markets of India.3 85. Though Navneet’s publication business grew by 23%yoy in FY08.4 159.6 24.3 615. parts of Africa. Despite its strong positioning.2 177.7
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.3 2603. SSKI Research
FY04
2530 85 142.9 157 303. which would boost its overall growth.7 551.

Churn in existing franchisees and growing competition are the key risks going forward. the management expects to aggressively focus to scale up these venture. recently renamed Zee Learn). subscribed and paid-up equity capital of the company post arrangement comes to Rs97.IDFC .SSKI INDIA
ETCN (Zee Learn)
Leader in Preschool
Rs74 UNRATED Mkt Cap: Rs721m.
Company background
ETCN began its journey as Zee Education. With 623 preschools across India.
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.8→ 6. IDFC-SSKI
Zee Learn is present across the value chain of IES with significant presence in the preschool market under the brand Kidzee (currently 60% of education revenues).456 equity shares of face value of Rs10 each.4m consisting of 9. ZICA (Zee Institute of Creative Animation) and ZedCA (IT training). Subsequently. Zee Learn was amalgamated with ETC Networks on 28 March 2008 under the name ETCN. set up in 1994. While the company has a small presence with the USD 1.7 mn shares)
ZILS (Education business) (2.744.000 preschools in the next two years. and morphed into Zee Interactive Learning Systems in 1999 (ZILS. The promoter’s shareholding has gone up from 50% pre-merger to 70% post-merger. ETCN has estimated revenue growth of 25% for FY09 and expects margins to improve as capacity utilization builds up in its schools.7m
ETC Networks (ETCN) derives 32% of its revenues (Rs 778 in FY08) from its education venture Zee Learn with the remaining coming from the boradcasting businesses. Zee Learn has the largest chain of preschools under the brand Kidzee (60% of education revenues in FY08) and aims to grow the base to 1.
Source: Company.
Exhibit 13: ETCN – corporate structure
ETCN (9.9 mn shares o/s )
Kid Zee Preschool
Kid Zee High – K12
ZIMA – Vocational
ZICAVocational
ETC Punjabi
ETC Hindi
Across the value chain – Based on franchisee model
Amalgamation details .8 mn shares o/s)
ETC (Entertainment business (13. Zee Learn has also ventured into the K12 segment with 23 Zee High schools (8% of revenues in FY08) and aspires to grow to 100 schools over the next three years using a combination of JVs and consulation (franchisee model). With the scale-up planned in Zee Learn. US$14. The company has also ventured into the high school segment under the brand Zee High and plans to enter the vocational training market. (Management has said it is too early to give any comments on the details of the new business). The issued.5bn vocational training space with ZIMA (Zee Institute of Media Arts).ETCN issued and allotted one equity share of Rs10 each for every two equity shares of Rs10 each held in ETC. the education business’s share in total revneues of ETCN is expected to increase to 50% by FY10.

The funds will be used to develop three ‘Centers of Excellence’ across the country. Kidzee has presence in 275 cities through 623 centers (34% of the organized market and 7% of the total preschool market). Amritsar. Both the channels have a strong presence in their respective niches – ETC Hindi has a 42% share in the film/ music promos segment while ETC Punjabi (65% share of the Punjabi channels market) has exclusive rights for 11 years to telecast the Gurbani live from the Golden temple.000 preschools over the next two years under the franchisee model.
Zee High (K-12) – 100 schools planned over three years
At $20bn.SSKI INDIA
Kidzee – leader in preschools
Kidzee is India’s largest chain of preschools – an estimated $300m market offering 36% CAGR over FY08-12E. the company (or franchisees) is using the same two-tier structure deployed for preschools. wherein Kidzee centers will act as feeders to Zee High schools. extending the preschool initiative to K12 schools means that Zee Learn has a ready-made base of students for Zee Highs. Bangladesh and Nepal with plans to enter Sharjah. For Zee High. the funds will be used for developing content for higher classes and to develop content for the youth training programmes in the vocational training segment. Since 2006. Though the scale-up plans are encouraging. Kidzee has started preschools in Singapore. Kuwait. The company expects to have 100 Zee Highs operational over the next three years – primarily based on the “Hub & Spoke” model. K12 is the largest and most lucrative segment in IES. Stared in 2003.
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. Thus.
Utilization of funds
Zee Learn requires an estimated Rs1bn to fund its ventures and an additional Rs350m for working capital over the next three years. 23 Zee Highs have been signed up. we believe increasing competition would put a spanner in the proposed expansion. Further. Outside India.IDFC . 14 schools are greenfield projects. wherein a trust is set up to run the school and a managing company provides land and other management services in lieu of a fee.
ETC – broadcasting
ETC Networks is a broadcasting subsidiary of Zee Entertainment Enterprises with two free-to-air channels – ETC Hindi and ETC Punjabi. which will be owned by Zee Learn and act as a model to other franchisors running Kidzees and Zee Highs. Zee High plans to expand in two ways – either through greenfield projects or by using the conversion model (schools have trusts that are defunct and/ or the bodies are looking to offload the venture). IDFC-SSKI estimates
Kidzee plans to scale up to 1. of which nine are currently operational. The company is looking to meet this requirement through internal accruals of Zee Learn and the remaining from a cash-rich erstwhile ETCN.
Exhibit 14: Major players – the largest player in the segment Kidzee has 7% of the total market
Organised Market Share
Treehouse 3% Kangaroo Kids 4% Shemrock 5% Others 12% Kid Zee 34%
Apple Kids 12% Euro Kids 30%
Source: Company. Of the existing base of 23 K12 schools.

IDFC . The company was renamed Egmont Imagination India 2001 – Company ventured into the preschool segment with two pilot preschools in Mumbai 2004. A management buy-out is effected with an employee trust. i.SSKI INDIA
EuroKids
Preschool and books
UNLISTED
EuroKids is the second largest player in the Indian preschools market with 484 centres operational pan-India (30% of the organized market).000 titles and expects to add 200-300 titles every year. The company exited its loss making segments of toys and children’s magazines. EuroKids plans to strengthen its brand within the K12 segment. Started in 1998. EuroKids has 60% of the licensed book publishing market in India. which expands the scope of market as affordability increases. Also. The difference in price points is significant.Egmont International Holdings.
Company background
1997 – JV formed between Indian Express and Egmont International (Indian Express Egmont Publications Ltd) 2000 . the company expects 30-40% CAGR in its revenues (Rs200m in FY08.9bn from $12. BBC worldwide. Denmark. Educomp Solutions (one of the pioneers in the education space) has acquired a 50% stake in Eurokids for Rs390m. bought back the shares of Indian Express in this joint venture making EuroKids its 100% subsidiary. While 30-40% of EuroKids’ sales are through the retail stores. Catering essentially to children’s books segment (age group 2-12 years).e. to $93.4bn at present – sour ce: FICCI). Mattel. a Denmark media and publishing company wanted to expand in India.
Exhibit 18: Licensed book publishing Imported Disney hardbound book in India
MRP Rs 250
Disney hardbound book printed in India
Rs 130
EuroKids has a strong content library of 1. Going forward. The market is largely driven by growth in organized retail (22% of total retail market by 2010E. 50% from preschools and 50% from publishing) and to achieve a PBT of Rs250m-300m over FY08-12 (Rs16m in FY08). The children’s book market is expected to maintain its pace of growth at over 15%yoy. Enid Blyton. this was the original business that Egmont Publications. Licensed book publishing – This business entails securing a license from leading children’s brands and printing the content in India. Noddy and Tintin. the management feels that this business will grow on the back of the 35% CAGR in malls. Nickelodeon among others) in this segment.
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. 2008 – Educomp acquires 50% stake in the company for Rs390m
Publishing business – leader in children’s books
The Indian publishing industry sales are estimated at ~Rs70bn annually and the children’s book segment comprises 30-35% of these sales. Mattel. The company is also the largest publisher of children’s books in India (>10% market share) and has licenses from marquee international names (like Disney.Egmont exits India and other Asian markets due to consolidation pressures in Scandinavia. The company is a licensed book publisher in India for Disney.

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.
Management Profile
Uday Mathur – B.500 sq. Summer Club. The move would be a logical extension for EuroKids as it has a large feeder base of preschoolers that can be tapped for K12 schools. Built on a 2. Under this initiative. After a successful tenure with TI Cycles as General Manager-Marketing. EuroSmart. EuroKids has introduced programmes such as EuroGym. Vikas Phadnis – MBA-Marketing (Mumbai University). Going forward. primarily through using the franchisee route (franchisee to owned preschools ratio of 98:2. planned to be rebalanced to 80:20). one each in Jodhpur. a total of 80.000 students have been a part of EuroKids till the year. The chain forms 30% of the very nascent and small organized market in the preschool segment. EuroKids currently has three campuses under the teacher training initiative. CS.E. he joined Egmont India as Head of Sales & Marketing in 1998.000 preschools in its fold over the next five years. EuroKids has 484 preschools across 160 cities of India and its preschool franchisee chain is second only to KidZee (623 preschools). Jodhpur. we believe that preschools with high school models will emerge stronger than standalone preschools. All these six schools are expected to be operational by June 2009. these centers have been set up at a cost of Rs2m ex-land. Nadiad and Jalna. Educomp Solutions – a leading company in IES with presence across the value chain – has recently picked up a 50% stake in EuroKids for Rs390m. Tumkur and Davangere through the franchisee model and has also tied up for another six schools in Bangalore. and MBA (IIM-Kolkata). Prajodh Rajan – BBA (Madras University). EuroKids is offering the franchisees support to lever the existing infrastructure beyond the preschool hours for different activities under a revenue share model. He was heading the Finance function in an RPG group company before joining Egmont India in 1998. ft area each. Hassan. Ganesh Viswanathan – CA. He has been associated with kids’ brands throughout his career. To make the business more attractive for franchisees as also to generate incremental revenues for itself. After spending nine years heading Advertising & Marketing functions in Telecom and Automobile industries. etc. With 29. EuroKids currently operates four K12 schools in Hyderabad. the company plans to have 1. Jaipur and Hyderabad. he joined Indian Express Egmont in 1997 as Country Head. Going forward. Guwahati. Also.IDFC . EuroKids plans to generate an additional source of revenue as well as train its teacher requirement under this programme. Tura.
Future Outlook
EuroKids is planning to expand its education portfolio into the K12 segment.SSKI INDIA
Preschools – a relevant player
Started with two pilot preschools in Mumbai in 2001.000 students enrolled in its schools in FY08. He has extensive experience in marketing & operations within the Automobile & Auto-finance industries and joined Egmont India in 1999 as Project Head.

KKEL is using not only the pure franchisee route but also a JV model (400 JVs signed with developers and key partners). ICT Training. Kangaroo Kids Toddlers Club Centers and Billabong High International Schools (K-12. Primarily a niche player.
Exhibit 19: Business overview
KKEL KKEL
Kangaroo Kids (Preschool) Kangaroo Kids (Preschool) 60 –– Pan India 60 Pan India
Billabong High (K12 )) –– 6 Billabong High (K12 6 operational. Mumbai. Interesting and ageappropriate activity-based curriculum is the key factor behind the school becoming extremely popular with parents as also children. • Franchise partners were appointed for the cities of Kanpur. The schools are a mix of preschools (90% as pure franchisees.SSKI INDIA
Kangaroo Kids Education
Innovative Preschooler
UNLISTED
Kangaroo Kids Education (KKEL). Jaipur. The company also has a small presence in teachers’ training and merchandising (books and music) segments. starting with a Kangaroo Kids Club centre in Worli. two preschools in Dubai).Vocational Plans. ICT
Kangaroo Kids Rs45000 per student pa
Brainworks Rs 30000 per student pa
Kangaplay Mall model
1 yr diploma ECCE Rs 28000 pa 5th year of operations 200 teachers till date
1yr Cambridge Teacher Training (E-learning) Rs 30000 pa.IDFC . seven operational schools). operates 65 schools in India situated in 17 cities. we believe. the school was running two shifts and had a capacity of 125 students. the opening of the first outstation franchise partner in Delhi and the opening of the first Kangaroo Kids Primary School in Juhu. Mumbai. D. KKEL appointed its first franchisee partner for Santa Cruz. Mumbai.Vocational Training. In December • A merger was effected between Kangaroo Kids and Kangaroo Kids Club centres. Mumbai and the first Kangaroo Kids Club centre in a mainstream school – G. would allow KKEL to improve the overall economics and make the preschool model more economically viable. KKEL is expanding its preschool presence to a wider market with a relatively less-frills model under the brand 'Brainworks'. Mumbai with an initial capacity of 25 students. By 1994. 4th year of operations 45 teachers till date
Source: Company. Started with the opening of Kangaroo Kids Preschool at G D Somani Memorial School. Mumbai. E-learning. IDFC-SSKI Research JANUARY 2009
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.
1999
2000
2002
Source: Company. IDFC-SSKI Research
Company background
KKEL had set up its first preschool in Bandra. Chennai and Pune. 14 signed up
KITDR KITDR (Teacher training) (Teacher training)
Kangabeats Kangabeats (Merchandising -. and gave birth to KKEL.
Exhibit 20: Company history
1997
Ms Ashar opened the first Kangaroo Kids Toddlers Club in Khar. The popularity of the school and its concepts encouraged Ms Lina Ashar (the founder) to explore new expansion avenues.Books (Merchandising Books and music) and music) Plans. Bangalore. The strategy. In 1995. This unique concept of mother-toddler activity club was introduced for the first time in India KKEL embarked upon an expansion phase in 1999. 14 signed up operational. E-learning. An innovator in the preschool space. Somani Memorial School at Cuffe Parade.

While KKEL would be the first mover in the mall school model.
K12
Under the brand name of Billabong High International Schools.000 pa per student. Chennai. books and audio aids. ft by 2015.
•
Kangaroo Kids – With average fees of Rs45.
•
•
In order to supplement children’s learning with high quality and innovative resources such as CD-ROMs. this brand caters to a wider market. the company plans to operate across IES including vocational courses. The programme offers a part time one-year diploma in ECCE @ Rs28. The course is in its fourth year and 200 teachers have been trained here till date. Bhopal and Noida. Kangaroo Kids has established ~60 preschools across India (and two in Dubai) and a brand name as a niche player catering to the upper middle class with per student revenue of Rs45.000 per annum. Lina began her career as a secondary school teacher in Australia. secondary. KITDR has also tied up with Cambridge University in order to launch an online teachers training programme @ Rs30.IDFC . a music composer). Vadodra. KKEL is using different models in order to lever the changing mind set associated with preschools. ICT to schools and other areas related to merchandising (books and music). Under a tie-up with Star TV.
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.
Future outlook
While K12 is expected to be the largest revenue contributor for KKEL going forward. Kangabeats Entertainment Pvt Ltd has been set up by KKEL in association with Rachel Productions (promoted by Raju Singh. which we believe is a better strategy than having IB schools as acceptability of IB education is not yet attuned to Indian competiveness. KKEL has set up a Teachers’ Training Center in Bandra (KITDR) that offers one-year certificate programme in ECCE (Early Child Care & Education). As a teacher in Mumbai. technical and special needs schools. this brand will continue to cater to the upper middle class.000 with 70% of onground training in the existing schools.000 pa per student. Brainworks – With average fees of less than Rs30. The content comes across as thoroughly researched and there seems to be a conscious effort to use innovative teaching styles to get across to the children. she came back to India with a dream of making a much-needed difference in the field of education. KKEL currently has seven schools in cities of Mumbai. Kanpur. KKEL plans to tie up with major retailers with the objective to run preschools during the mornings and day-care centers for the remaining part of the day. This led her to start her first preschool in Bandra (Mumbai). ft in 2006 to 300m sq. She has experience in teaching in Australian High Schools. Lina Ashar has educated and trained in Australia. the economics of this model will play out depending on the JV terms with mall developers. Director and Educationalist): Ms.
Teachers’ Training
To ensure development of teachers who can adapt to and incorporate the innovative learning solutions. The preschoolers are offered an average class size of 18-20 and a teacher student ratio of 1:6 for nursery and 1:8 for preschool. Kangaplay (Mall model) – Levering the retail boom. Lina underwent training for four years in theoretical and practical knowledge and gathered experience in all kinds of primary.
Management Profile
Lina Asher (Founder. e-learning. Equipped with a Bachelor in Education degree from Victoria College Melbourne. The course is in its third year and 15 teachers have trained in the last year. We feel that these facilities can be further utilized as play-pens for kids even in the late evenings when parents come to watch movies or shop in the malls. Jaipur. India with a teacher student ratio of 1:6 for nursery and 1:8 for preschool.000 pa. these centers are expected to grow to more than 400 in number in the next four years. The retail space is expected to grow from 25m sq. she soon realized her limitations in providing individual attention to each of the 60 odd students cramped in a single classroom. KKEL plans to have IGCSE/ ICSE recognized schools.SSKI INDIA
Preschools – innovative models are the winners
Since 1993. In 1993.

nine years Director of International Management – Consulting a Business Recovery Company (Dubai). Ms Kiran Bajaj. His qualifications include Bachelor of Commerce. Mr Prahlad and Ms Mitali Kakkar. Masters of Commerce. Mr Ravi Shastri.SSKI INDIA
Paul Solomon (CEO since January 2008): He has refinanced KKEL.
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. and restructured KKEL to build bandwidth and execution strategy. Previously Professor of Management with a University in Australia. Management and Company’s Director. three years Executive General of Spotless Group (a listed ASX company with market capitalization of AUD $1 billion and revenue of AUD $3 billion per annum. Mr Keith Butler. Ms Sonia Grinceri. Dr Richard Johnson and Mr Andrew Houghton. and helps ensure that the objectives set by KKEL in its mission statement are being fulfilled. five years CEO – One of Australia’s largest Hospital centres. two years
•
Advisory Board The advisory board assists in activities and projects.IDFC . He has 20 years of worldwide experience as a senior executive including:
• • •
Managing Director – Health Department (Australia). Senior Fellow of Institutes of Accounting. established a major JV (Brainworks). Dr Ishverlal Desai. including Ms Tina Anil Ambani. The board comprises eminent personalities from diverse fields.

Tree House has backward-integrated into the teachers training business. Given that location is a key advantage in the preschools business. In the $300m preschool market. Tree House plans to finance its growth through additional channels like private funding (Matrix Partners has invested $7. this strategy helps it maintain profitability ratios and also ensures healthy revenue growth. According to the management.SSKI INDIA
Tree House
Largest non-franchised preschool
UNLISTED
Started in 2003. the company has also diversified into a low-cost. With a firm grip on day-to-day operations of its schools. Tree House has ~65 centers with an average of 80-100 students per center and caters to children in the age group of 1.5m in August 2008) and subsequently through an IPO. over the last five years.5-5. In this regard. Tree House is the largest non-franchised branded preschool chain in India (90% of its centers are run by the company). This will ensure strict control on service delivery. This gives the company sufficient control on pricing as well as costs. Tree House enjoys high operating margins. which would help it improve the average revenue per center.IDFC . Tree House has recently introduced various value-added services.5 years.
Preschools all the way
One of the few players in the preschool segment opting for a ‘non-franchised model’. Tree House has. To get access to a base of low cost-high quality teaching staff. the company focuses on delivering quality. Build on the franchising business Having recently entered the franchising space aggressively. Tree House plans to extend its footprint in Tier-3 and Tier-4 cities in the country through the franchisee route. The company has drawn a three-pronged strategy for its future growth: Replicate the Mumbai growth model in other large Indian cities Tree House plans to open self-operated centers in some of the large cities of India. With an existing base of ~65 centers (50 centers in Mumbai). thus enhancing its brand equity. With a healthy mix of franchised as well as non-franchised centres.
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. Tree House has set a target of achieving 50% CAGR over the next three years. With a balance sheet size of ~Rs450m. Increase offerings at the centre There lies significant opportunity for preschool centres to improvise on revenue generating avenues by adding to the bouquet of services. Tree House is planning to tap customers across segments at various price points and service requirements. not only created strong brand equity but also set high standards in preschool education. To gain incremental market share. The company has created strong entry barriers in Mumbai as it is sitting on expensive commercial real estate at prime locations of the city. Tree House is set to redefine the preschool business. no-frill chain of preschools (branded as ‘Titli’) targeted at the mass market and has started day-care centres (branded as ‘Muskaan’). which gives it enough leeway to compete in a price-war scenario. expected to expand at 36% CAGR in the coming years. Titli and Muskaan are still nascent ventures and the management sees huge growth potential in these two brands. Tree House is working to achieve a 50% CAGR in its revenues over FY08-12. Going forward. this implies less competition for Tree House – at least in Mumbai. the company has achieved significant presence and is currently one of the largest players in the organized preschool market. With around 200 qualified teachers on its roster.

if addressed well. She currently oversees curriculum design and supply chain management. Rajesh Bhatia (Chairman and MD): Mr.5m by Matrix Partners). Motilal Oswal and Indsec Securities before launching Tree House. Mr. Bhatia is the co-founder of Tree House and has played a key role in the company’s growth story. he was MD at WestBridge Capital Partners – now known as Sequoia India. Titli addresses this segment of the market and facilitates high-quality preschool education at an affordable price. Muskaan. Geeta Bhatia (Director): Mrs. He started his career as a Fund Manager with 20th Century Finance Corporation in 1993. Navani is the co-founder and MD of Matrix India and has been investing in India since 1996. The new-age India is witnessing rapid proliferation of the nuclear family culture where both the parents are working and there is a dearth of high-quality branded day-care centers in the country to address this increasing demand. Rishi Navani (Nominee Director): Mr. can emerge as an attractive avenue for generating incremental revenues.SSKI INDIA
There is increasing awareness for preschool education even in the low income strata of the population which. meanwhile.
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.
Management Details
Mr.
Funding plans
Tree House plans to finance the aggressive growth through private funding (recently received private equity funding worth $7. internal accruals and subsequently through an IPO. Muskaan is one of the early entrants in this business and it gives Tree House a head-start to emerge as a large chain of branded day-care centers in the country.IDFC . and later worked with Sigma Capital. Previously. Bhatia is a BE in Computer Science and an MBA. addresses the increasing demand for day-care from parents with double income. Mrs.

Helix Investments picked up a 30% stake in Mahesh Tutorials for $12m.IDFC . Due to low scalability in tuitions market. It has a small presence in the South India market. Gujarat and a single center in Dubai. 1.000 students over a period of two decades.000 students enrolled for its classes. vocational training) 15% of revenues
SSC (90%)
ICSE & CBSE (10%)
11th. the space is inherently non-scalable and regional in nature. which values the company at ~$38m. the company has stated its intent to tap the Middle East and South East Asia regions. the company’s scope of operations is restricted largely to Maharashtra (concentrated in Mumbai). has captured only 3% of the SSC tuitions market in Maharashtra. seven teachers and 300 students. The management expects Mahesh Tutorials to grow to ~Rs1bn by FY10 with 40% growth in its existing tuitions business (schools. Going forward. BCOM. While 50% of its revenues accrue from the schools tuitions market. i.
Exhibit 21: Business Overview
Mahesh tutorial Revenue breakup
School 50% of revenues
Science 20% of revenues
Commerce 15% of revenues
Others (Preschool. we feel the inorganic route as also diversification into high-potential and scalable segments of IES are logical moves. Mahesh Tutorials.SSKI INDIA
Mahesh Tutorials (MT Educare Pvt Ltd)
Most scaled up in a non-scalable business
UNLISTED
Mahesh Tutorials is a relatively scaled up player (revenues of Rs700m by FY09E) in the subject-based tuitions market ($5bn in size but highly fragmented) and the only player to get funded in the segment ($12m from Helix Investments for a 30% stake). Engg CET. In August 2007. Rs1.
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.6bn.
Business overview
MT Educare is present predominantly in subject-based tutoring across school and college levels. 12th.e. Mahesh Tutorials has scaled up to 153 centers. Med CET
11th 12th CA-CPT. The tuitions market is so fragmented that MT Educare has only a 3% share in Maharashtra despite being a leader in SSC school tutoring and 90% share of the market. CA Final. and the remaining 15% by its new businesses. While we estimate this market to be at $5bn. one of the largest players in the space with 15. 35% are accounted for by college level tuitions (Science and Commerce). Execution and ability to build scale are the key monitorables.200 teachers and ~30. and science and commerce streams for colleges) and more than 100% growth in its nascent businesses – vocational training and preschools.MCOM
Source: Company
Subject-based tuitions: MT Educare generates one-half of its revenues from subject-based tutoring in schools. Currently.
Company background
Started in 1988 with a single center. CA-PCC.

However.000
Average fee (Rs pa)
10. etc) to check their viability and scalability. training workshops for teachers.000 56. IDFC-SSKI Research 150. of Students % enrolling for classes Target market (Students)
720. on account of a change in examination pattern for students appearing for CA entrance exams (format has shifted from CA foundation to CPT – a multiple choice format making the test paper much easier to crack). specifically in the commerce stream.
Exhibit 24: Mumbai classes snapshot – Mahesh most scaled in a non-scalable business School level
Sinhal classes Mahesh Tutorial
Category
ICSE SSC.200
SSC 1.000 250. Going forward. * English medium fee -12-15k. On the other hand.
Exhibit 23: CA market – an uptick in student base No.000
Target mkt (Rs m)
1. ICSE.000
% enrolling for classes
80 80 80
Target market (students)
120. around 90% of the revenues within this segment come from SSC students.IDFC .000
Average fee (Rs pa)
10. MT Educare has also forayed into the preschool segment under the brand ‘Little Tigers’ (10 owned-preschools operational in Mumbai). Mahesh Tutorials has successfully transformed the ‘people-driven’ model into a ‘process-driven’ one (to an extent) by standardizing content delivery.200 840 480 2. it plans to adopt the franchisee route for a quicker scale-up. execution and ability to scale remain the key monitorables.200.000 24.SSKI INDIA Exhibit 22: Maharashtra school SSC Market No. MIS.520
Target mkt ($ m)
30 21 12 63
Most scaled up in a non-scalable business
Mahesh Tutorials has established relative scale within the subject based tuitions market in Maharashtra.500 per annum (LCD-equipped classrooms with 25 students per batch). vocational training.8-10 k
For Mahesh Tutorials.000 70. From the next academic year. of students
CPT PCC CA Final Total CA market Source: Company. In the recent past. ICSE students are offered tuitions only in mathematics and science for Rs49.000 per annum. these students will now be offered multimedia based classroom coaching (60 students per batch) and offered a compulsory all-subject package at Rs30. mapping the organization’s performance from the results. * Marathi medium fee . the segment has seen an uptick in student base. CBSE Commerce and CA commerce and CA science science
No of students
1000 15000 6500 7500 3500 2000
College Level
JK Shah Mahesh Brilliance Classes Karla Shukla Source: SSKI Research
Future outlook – exploring newer markets
MT Educomp plans to grow organically within Maharashtra and inorganically outside the state in the tuitions segment.
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. Further. acquisitions and moving up the value chain of IES is clearly a logical step in the right direction. the company is testing waters in various new segments (online tutoring. 360˚ appraisals and succession planning with growth opportunities for the staff. This has pushed up the number of students taking the CA entrance test by more than 50% yoy.000 30. The company derives another 35% of its revenues from subject-based tuitions targeted at college students.000 20.000 60% *source: industry.000 15.000
Target market (Rs m)
7. periodic reviews. With limited scalability in the tuitions market.

IMS expects to extend these to other high growth areas as well. IDFC-SSKI Research
IMS generates revenues within the test prep space through classroom teaching. Even though consulting offers the highest margins. The company sees good prospects for the school as only a handful of B-schools are present in the East (IIM C.IMS has invested in an MBA school under the brand name Praxis (started in 2007 in Kolkata) with a capacity of 160 seats (50 students currently enrolled). The company is a leader in the test prep market (90% of revenues) with strong brand equity in the western and northern regions. With limited scalability possible in the $200m graduation test prep space. franchising model and new products would also contribute. SAT and consulting). wealth management. IMS has a total of 185 centers with 135 centers in partnership (100 partners. IMS is one of the largest unlisted players in the education space. One of IMS’s key strengths lies in its mock tests called SIMCATS. While most of its owned centers are located in key metros and towns. Expanding its horizons in Higher Education .
Test prep classes – the largest business segment for IMS
One of the largest players in the test prep space. Additionally. IMS is a strong brand in the western and northern regions of India. test series and consulting. IMS has extended its offering to certification programmes (finance and retail). investment banking and retail management. though contribution to revenues is still not material. which are very popular across the MBA aspirant market. In future. 40-50% of the total students are within the owned centers. In the MBA test preparation space. test series and consulting. IIM Shillong and XLRI
136
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. the company plans to straddle the entire higher education bandwidth by investing in B-schools and other vocational training ventures in the future. publications. language training and formal higher education. its contribution to revenues is at 5%. GRE.SSKI INDIA
IMS
Entire Bandwidth of Higher Education
UNLISTED
With revenues of ~Rs1bn in FY08.
Exhibit 26: Revenue and margin mix
Revenues Consulting 5% Consulting 45% Margins Classroom 13% Corresponda nce 21%
Test series 5% Corresponda nce 10%
Classroom 80%
Test series 21%
Source: Company. one partner has more than one center) and 50 owned centers (owned to franchisee ratio of 30:70). IMS has ~50% share in the international test preparation market (GMAT. Around 80% of revenues are accounted for by classroom trainings with the remaining coming from correspondence. mock tests called SIMCATS are a differentiator for IMS and a key strength.IDFC . correspondence classes. IMS has also started various vocational courses in financial planning. inorganic initiatives.
Future outlook – to cover the entire bandwidth of higher education
While growth in the coming three years would come primarily from test prep business and certification programmes.

In the next five years.SSKI INDIA
Bhubhaneshwar). Mr Nilesh Sarawate (Director for Test Prep): An engineer and management graduate from TAPMI Mr Gejo Shreenivasan (GM for Non-Metro Partners): An engineer from IIT Madras and MBA from IIM. Mr Kamlesh Sajanani (Managing Director): A key driving force for IMS. a hotel management graduate (and Mr Rane’s nephew) Mr Sanjay Choudhary (COO): An engineering graduate from Delhi College of Engineering and a management graduate from IIM. Bangalore. Calcutta
•
• •
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137
. founder of IMS) owns 85% of the company.
Management Profile
• •
Mrs Lila Nagesh Rane (wife of late Mr Nagesh Rane.IDFC . IMS plans to set up three more business schools in non-metros but highgrowth areas such as Chandigarh and Gurgoan.

GMAT (JV with Veritas – 3rd largest GMAT company globally) IIT – Market leader in Mumbai (tie up with Arun Roy classes). it has set up two standalone model Ananda schools (preschools) and five K12 schools – Indus World School.BBA/BMS Lohana test series . the company plans to extend its footprint across the education spectrum spanning preschools. Career Launcher has ventured beyond the coaching class market – into K12 schools and higher education institutes in the formal education space (a $40bn market). More than 70% of its revenues (Rs900m in FY08) come from the MBA test prep segment – the largest within the post-grad test prep space.IDFC . Career Launcher has so far seen private equity of $8.Indus World School (currently 5 schools) Indus World School of Business started in June 2008
Grad Test Prep Market Tuitions Preschools Schools K12 MBA College
Source: Company. 150 K12 schools and ~25 finishing schools (vocational training centres) in the next few years. which it estimates to go up to 75. Career Launcher is a leader in the post-grad test prep space ($200m market) with a 30% share in the MBA test prep market.000 students in FY08.CAT.LST . Career Launcher has indicated its plans to tap the capital markets (also. The company trained 50. Hong Kong and South Korea – the centres are planned to be set up under its joint venture with Veritas (the third largest GMAT education company globally).
Moving up the value chain
To achieve scalability. To start with. It is also planning to set up coaching centres in other countries including Singapore.10th-12th boards. Career Launcher currently runs 135 coaching class centers with 70% of them franchisees. Currently. K12 schools. a mix of tuition classes.
Exhibit 27: Business Overview
Segment
Post Grad Test Prep Market
Description
MBA Prep . IDFC-SSKI Research
Future outlook
Career Launcher plans to set up 125 playschools.000 students in the current year. higher education institutes and vocational training to providing coaching and counseling at all levels.
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.MAT. Having established strong brand equity in the northern states. CET in Maharashtra).SSKI INDIA
Career Launcher
Spanning across the value chain
UNLISTED
One of the leading players in the post grad test prep market ($200m). and preschools ($300m) in the non-formal space. State Exams (eg. XAT. Career Launcher clocked revenues of ~Rs900m in FY08.
Leading player in post grad test preparation space
Incorporated in 1995. I-V Vedic maths Under the Career Launcher Education Infrastructure and Services (CLEIS) Ananda – A chain of preschools Under CLEIS . The company has also recently set up an MBA College in Noida – Indus World School of Business. To fund these initiatives. To raise funds for the ventures. IIFT.3m by Gaja Capital in October 2007). Going forward. Career Launcher plans to come out with an IPO in the next couple of years. Career Launcher plans to scale up to 250+ centers over the next two years. grad test preparation centers – mainly for IIT-JEE trainings and post-grad test preparation centres. three out of these five schools are owned and two are franchisees.Law Student Tutorial.

SSKI Research
Tutor Vista (Global): An online tutoring model. Tutor Vista has acquired an Indian company called Edurite. Funding: Tutor Vista has had four rounds of funding till date. With this acquisition. Tutor Vista Global offers low cost tutoring to students world over. a student opting for two hours a day five days a week has to pay only $2. which has developed multimedia content for K12.
Exhibit 29: Tutor Vista . Maths and Science. With Tutor Vista’s offerings. The USP of the model is the cost arbitrage that it offers – in the US. the company has created a presence for itself in the Multimedia for private schools space. gets access to unlimited tutoring hours for subjects like English. The student can connect to an online tutor based in India and for $100 a month. Tutor Vista (primarily an online coaching service provider in the US as Tutor Vista Global) is now increasing its focus on India with the acquisition of Edurite (a multimedia content provider) in order to tap the high growing multimedia to private schools space and other opportunities in IES. Ganesh. Edurite (India-focused): In order to increase its India focus.SSKI INDIA
Tutor Vista
Wants to tutor India
UNLISTED
Founded in July 2005 by entrepreneur K.
Exhibit 30: Funding till date
Sequoia Capital Lightspeed Venture Partners & Sequoia Capital Manipal Education Lightspeed Venture Partners Source: IDFC-SSKI Research Online tutoring (increasing India focus) Tutoring 2.Business Model
Tutor Vista
Tutor Vista Global (Global Focus)
Edurite (India Focus)
Online tutoring model
Multimedia in private schools Offline Tutoring English Training
Source: Companies.5 per hour of tutoring.5 18 Oct-07 Jul-08 Online tutoring (US focus) Online tutoring (US focus) 2 10 Jun-06 Dec-06
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. tutoring rates are in the range of ~$100 per hour for face to face tutoring and ~$40 per hour for online tutoring.IDFC . Tutor Vista is extending its presence in ‘offline school-level tutoring’ with ~25 centers (majority using the franchisee route) and using the same infrastructure to diversify into English trainings as well.

In May 2002. Ganesh headed the Contact Center Business as President. ICICI OneSource (handling over 4.SSKI INDIA
Management Profile
K Ganesh (Founder and CEO): His previous venture. was started in mid-2000 targeted at the international Call Center / BPO sector. where he held several key managerial positions. Post the acquisition. Ganesh is MBA from IIM. Apart from founding and successfully growing the three ventures. The company has now been renamed FirstSource and is listed on Indian bourses.IDFC . ICICI (India’s largest bank) acquired CustomerAsset for ~$22m. CustomerAsset. Ganesh has worked as CEO of Bharti British Telecom – a British Telecom JV in India.
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. and in HCL.000 people and annual revenues of $30m). Calcutta and is currently on the panel of Venture Advisors of UTI Venture Funds and a charter member of TiE (The Indus Entrepreneurs).

the franchisee is required to have a 1.000-300. Ltd. The only player to be funded within the English training space. business people and housewives in spoken English over the last 25 years through a combination of direct class coaching and distance education courses.
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.
English training market
VETA sees a potential of 130m students in the English training market based on the number of people who can read and write English but cannot speak the language fluently. Notably. it has a small international presence using the franchisee route.9m students.Rajagopalan as Vivekananda Institute.IDFC .000 per centre. job-seekers. Teachers are paid Rs120-150 per hour in metros.5m franchisee fee for a 5-year contract period. (formerly known as Vivekananda Institute).2001. The main operating costs include outgo on teachers’ salaries and rentals.000 would require a 500 sq. Locations with population of 100.800 sq.500 and two-month duration for Rs6. The centers have a 50:50 mix with respect to owned and franchisee centers. which belongs to Amoha Education Pvt. Initial investment is ~Rs1. has trained more than 1. VETA has more than 90% of its revenues accrue from the Indian operations. VETA caters to the English training needs of retail students. employed people. Franchisee economics – In locations with population in excess of 400. ft area with one classroom and a fully furnished front office. ft area. rental costs are the key variable for ascertaining profitability of a centre.SSKI INDIA
VETA
‘Leader’in English trainings
UNLISTED
With revenues of ~Rs600m. The area needs to be divided into three classrooms of 300 sq.2m.000.000-500. which entails a Rs0. The company offers short-term courses including those of one-month duration priced at Rs2.
Company background
Founded in 1981 by V . ft each and a fully-furnished front office. VETA.000. the company has received private equity to the tune of $ 10m from SAIF capital. The company has recently also forayed into soft-skill and personality development training. VETA is India’s largest English training institute with 175 centers (planned to be scaled up to 500 by FY10). the academy has focused on expansion beyond South India and developed a nationwide footprint in the past three years. corporates through in-house training and the home-study pack. This would entail an investment of Rs300.

Mesra. IDFC-SSKI Research
Management Profile
Mr Vivek Agarwal (Founder and CEO): An MBA from IIM.
Exhibit 31: Liqvid – growth strategy
High Inlingua HMM High Liqvid moving here through tie-ups with publishers and increased sales and marketing effort Interactivity &Customization
Quality
VETA BSL
Foreign Players like Rosetta stone Macmillan Pearson High
Mom & Pop shops
Low
Cost
High
Low Brand and Reach
General & Social segment – addressed through retail channel Technology-centric approach – high-quality.
Focus on English training – product licensing
Liqvid plans to derive its growth from the niche English training market. low-cost model
Work & academic segments – addressed in content license mode.): MBA from Indian Institute of Technology. Founder-promoter of ‘eGurucool’ – raised $11m in PE.IDFC .5bn). With estimated revenues of Rs90m. COO and V. the company expects revenue from English trainings to account for ~40% of the total by FY09. Later sold to NIIT Manish Upadhyay (Co-founder. Currently. the company has developed a product ‘English Language Edge’. Calcutta (1995). Delhi and Engineering Graduate from Birla Institute of Technology. Jetking (IT hardware trainings) and STG. The company has invested in creating 200 hours of content in association with BBC Active (a significant brand in language trainings) targeted at customers that require English training for social. While ~80% of the revenues are from the e-learning business (global clients such as HP. publisher tie-ups to provide brand awareness and reach to Liqvid
Source: Company.P. Keen interest in promoting education & training with the use of technology.
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. More than 12 years of experience in the e-learning industry.SSKI INDIA
Liqvid
E-learning to Spoken English trainings
UNLISTED
Liqvid is operational in the e-learning space and is building up its presence in the English training space in India using the product licensing route. Within the market (estimated size at ~$0. With revenues of ~Rs80m (primarily from e-learning initiative). Liqvid’s product users include players like Frankfinn (aviation and hospitality training). Cisco and Adobe). Liqvid expects ~70% CAGR in its business for the next five years on the back of rising demand for English trainings. the company expects the services business to run in an auto-pilot mode and plans to focus aggressively on licensing its English training products. work-related and academic needs.

Future outlook
Russell adopted the franchisee route quite recently in 2007 and has five franchisees till date.000.
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.
Management Profile
Mr. The company delivers training using three forms: C – Classroom. The revenue per student differs as the company offers various short term courses as well. E – e-learning. Russell Zaheer (Executive Director) is an International Diploma holder in Marketing from University of California: Berkley (Class of 2006). A two-month course. However.000-70. The business is seasonal in nature and a price-sensitive market (inability to charge premium to the target segment). Russell Spoken English is in the business of Spoken English training. for the next 5 years. The typical profile of the customer is between 27-35 years of age who is looking to grow within the current organization or sector. the company is now planning to consolidate its presence in the English language training segment using various new delivery models. The typical profile of the customer is 18-25 years of age who is looking for a first job.SSKI INDIA
Russell Spoken English
Spoken English trainings
UNLISTED
Started in 1986. This model is typically a B2B model where corporates would invest in e-learning modules for employees. execution of scale remains to be seen in the business. revenues are inconsistent during a year – which is a key risk for the company. With the franchisee business just about getting into expansion gear and the e-learning business about to start off.IDFC . the company expects to grow at a rate of 50 – 75% consistently. D – Distance. the company has a presence within the spoken English training space (estimated to be at ~$0. it is priced at Rs4. Russells (employee strength of 300) concentrates on the spoken English segment that to the basic English speaking needs. leading to the ability to customize the course.000 students. The company generates estimated revenues of Rs60m-70m and a net profit margin of 20%.
Business overview
Present withtin a highly fragmented market. Traditionally a family-run business. With revenues in the estimated range of Rs60m-70m currently. five franchisees) and 60. Within the market of English and life skills training.5 bn) with 30 centers (25 owned centers. The differentiating factor between a local unorganized player and Russels is volumes. every year.

SSKI INDIA
Shloka Infotech
Brand advantage
Rs24 UNRATED Mkt Cap: Rs93m. Infrastructure and Media. execution is the key monitorable. N. Everonn Systems and NIIT make it a difficult proposition. while moving away from the IT business that currently dominates the topline. Mr. Chief Executive Officer :A Civil Engineer with over 16 years of experience in various fields like Education. Strategy & Business Development : An MBA from Stanford University and a Chemical Engineer from UDCT. with an experience of over 14 years in of management consulting & industry. preschools and K12. A foothold in this segment also implies another longer-term advantage for players – as it would help them consolidate their position as and when the government aggressively adopts the PPP route for public schools (recently.5bn in these ventures over the next five years. Has worked as a part of the top management team in companies like Sunflag Group of Companies. Shloka plans to bid aggressively for ICT projects against the odds. Mr. Finance & Strategy: A Chartered Accountant with over 10 years of experience in Finance & Operations in Education and IT industry. Kedar Lathkar.
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. He has been successfully heading The YashBirla Group which consists of various group companies in Engineering. 70% CAGR over FY08-12E). YashBirla. Shloka is also looking to foray into the $300m preschool and the $20bn K12 (formal education) space by using a mix of owned. PVR Murthy. ICT in government schools. Shloka has invested Rs130m in creating 3-D animated multimedia content targeted at private schools (implemented at 50 schools in Maharashtra till date) and plans to invest a further Rs500m in upgrading the existing content. Mr.000 schools over the next five years.5bn over the next 5-7 years) remains to be seen a cash rich parent company and brand (Birla Group) are its key advantages. Group President. Aryaman Financial Securities Ltd. Shloka Infotech plans to extend its presence in the education space with Multimedia in private schools. the company expects its revenues to grow to ~Rs700mn in FY09 as the education business offers high growth. Vice President. From Rs300m in FY08. US$1. Chairman : He took over the reins of the group at an early age of 23 and has been heading the group successfully by setting very high standards of performance in all areas of businesses for the past 16 years. Health.
Future outlook – presence across the value chain
After making a start in the multimedia for schools space.
Current businesses – multimedia to private schools
Within the education vertical. Mr. The company has set a target of bringing 200 schools to its fold by the end of the academic year 2009-10 and 3. While the space offers immense untapped opportunity (a $70m market with expected CAGR of 60% till 2012).9m
A part of the Yash Birla Group. operations/ management of a few public schools have been handed over to private players).000-4. While execution in various segments and ability to raise funds (estimated capex of ~Rs2. Srikrishna. Group Finance Director : A Chartered Accountant and an MBA. He heads the finance and strategy function in education business of The YashBirla Group. Devang Vyas. Shloka plans to pursue ICT projects in public schools as well (a $90m market. Education and Travel. Lifestyle.IDFC . He is been instrumental in implementing various education projects for various prestigious universities like Anna university.
Management Profile
Mr. franchised and managed schools and plans to deploy ~Rs2. While incumbent leaders including Educomp Solutions.

A content service provider, Hurix is a provider of e-learning solutions with focus on content creation, digital conversion, management and delivery of content services. The company operates in the education space as it offers content services largely to global publishing houses for digitizing their content. All of Hurix’s revenues come from the US. Hurix has been one of the fastest growing companies in a highly fragmented market (more than 100 companies operational with less than $2m in revenues). Going forward, Hurix is planning to invest in an assessment product that will be licensed to corporates with testing and assessment needs. With revenues of ~$11m in FY08, Hurix expects to grow at 40-50% in the coming period (management has lowered its expectation in view of the slowdown) and a recent foray into the Multimedia for schools space within IES.

Focus on the education e-learning market
Though the corporate e-learning market is larger at an estimated $300m-500m, it offers low margins and little scalability as also lack of earnings visibility as contracts are short-term in nature. Hence, Hurix has limited its focus to the education e-learning space. The company generates its revenues entirely from the US market. The US e-learning (publishing) market is estimated to be $12bn-15bn in size, of which 10% is accounted for by digital content (ebooks). In the US, sales of text books have seen a decline and there is a correspondingly higher demand for e-content for various devices, phones, etc. E-books – Publishers want to lever the internet to provide interactive e-content to their customers. For example, a reader buys a hard copy of a book on DSP (digital signal processing) with an access code within the book, which enables the customer to log on to the website and view an interactive e-section on DSP at no additional cost (embedded in price of the hard copy).

Planned entry in IES
Hurix is also focusing on IES and has entered into a tie-up with a leading System Integrator in India to address opportunities in the digital education content (for schools) market. This relationship leverages Hurix’s world-class content development capability. Hurix has employee strength of 500+ and sales offices in Chicago, Dallas, New Jersey, London and Singapore.

Management Profile
Subrat Mohanty (Co-founder & CEO): He has more than 12 years of experience in the field of e-learning and digital content. Mr Mohanty holds a bachelor's degree in technology from IIT, Kharagpur, and an MBA from IIM, Ahmedabad. Viswamitra Hariharan (Co-founder & CEO): Mr Hariharan started his career in the technology sector. He has also worked as an equity analyst in the Indian IT services sector. Following this, he was an investment banker with the Bank of America, Hong Kong in its technology banking and M&A practice. In 2000, Mr Hariharan quit his investment banking job to set up Hurix along with Mr Mohanty. Mr Hariharan holds an MBA degree from IIM, Ahmedabad.

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IDFC - SSKI INDIA

Excel Soft
E-learning to trainings

UNLISTED

Started in 2001, Excel Soft provides e-learning (technology and content) solutions to players within the education and training space. A product and services business, the target customer segments include text book publishers, corporates and academic institutions offering e-learning systems to their customers, employees and students. Going forward, Excel Soft plans to tap the potential offered by the vocational training space in India. The company expects to generate revenues of Rs800m and PAT of Rs400m for FY09.

E-learning space – primarily export revenues
Within the e-learning space, Excel Soft is primarily a technology and content solutions company with ~95% of its revenues from overseas markets including USA, UK, Europe, Middle East and the Asia Pacific region.
•

Technology solutions (e-learning systems): A products business, margins range between 50-55%. The business involves licensing technical platforms (e.g. SARAS under the product suite of Excel Soft) that enable clients (companies/ institutions) to implement their learning and training programmes. The product is licensed typically for a period of five years. The revenues in this business come in the form of a yearly license fee, which is escalated by 50-100% yoy. Depending on the nature of the contract, additional revenues could accrue from AMC and other services as also a revenue sharing arrangement.

Exhibit 33: Product suite - SARAS

Source: Company • Content solutions: Excel Soft is moving from being a pure technology provider to a content development player. A services business, it earns margins of 30-40% from this activity. The company largely works on a hire and produce model for content development based on the storyboard provided. e-books is one of Excel Soft’s content solution services for clients (publishers) that want to lever the internet to provide interactive e-content to buyers of their books. For example, a reader buys a hard copy of a book on DSP (digital signal processing) that contains an access code within the book. The reader can use the access code to log on to the website and view an interactive e-section on DSP, and at no additional cost (embedded in price of the hard copy).

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software development. it plans to produce its own curriculum and content) and is also in talks with Indian institutes like CII and NIOS for certifications to provide value to users going abroad. Excel Soft is also scouting for a suitable foreign partner to source quality content (for the start-up centers. construction and finance as the key areas for the ventures. The company has identified retail. IDFC-SSKI Research
JANUARY 2009
149
. and Master’s Degree in Electrical Engineering
Source: Company. media. A B2C model in the infancy stage and execution remains to be seen.
Exhibit 34: Management Profile
Name Mr D. and e-governance Educational qualification Bachelor’s Degree in Instrumentation Technology. setting up vocational training centers is the next step
Excel Soft plans to lever its technology strengths to own brick-and-mortar vocational training institutes. The company is currently working on a project in India which involves developing curriculum design for numerous courses. later. Excel Soft has begun to develop its own IP content. Sudhanva Designation CEO & MD Past work experience teaching. The management is looking to initially set up a few Centers of Excellence and then grow using the franchisee route.IDFC .SSKI INDIA
With a view to move up the value chain in content solutions.
Future outlook.

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